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Petronet LNG: A lackluster quarter - Views on News from Equitymaster
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Petronet LNG: A lackluster quarter
Jul 30, 2013

Petronet LNG has announced results for first quarter of the financial year 2013-2014 (1QFY14). The company has reported a 20.1% year on year (YoY) increase in the topline while net profits for the quarter declined by 16.8% YoY.

Performance summary
  • Revenues grew by 20.1% YoY during the quarter.
  • Operating profits declined by 13.0 % YoY during the quarter (with margins at 4.7% as compared to 6.5% in the 1QFY13).
  • Net profits for the quarter declined by 16.8% YoY. The net profit margins for the quarter stood at 2.7% versus 3.9% in 1QFY13.

Financial summary
(Rs m) 1QFY13 1QFY14 Change
Sales 70,304 84,442 20.1%
Expenditure 65,733 80,464 22.4%
Operating profit (EBDITA) 4,571 3,978 -13.0%
EBDITA margin (%) 6.5% 4.7%  
Other income 266 152 -42.7%
Total revenues 70,570 84,594 19.9%
Interest (net) 329 240 -27.1%
Depreciation 459 467 1.7%
Profit before tax 4,049 3,423 -15.4%
Pretax margin (%) 5.8% 4.1%  
Tax 1,340 1,170 -12.7%
Profit after tax/(loss) 2,709 2,253 -16.8%
Net profit margin 3.9% 2.7%  
No. of shares (m)   750  
Diluted earnings per share (Rs)*   14.7  
Price to earnings ratio (x)**   7.8  
**On trailing 12 months basis

What has driven performance in 1QFY14?
  • The sales for the quarter grew by 20.1% year on year (YoY) on account of improved volumes and price realizations. The volumes for the quarter stood at 129 trillion British Thermal units (TBTUs), as compared to 122 TBTUs in 4QFY13 (up 6.1% quarter on quarter) and 127.17 TBTUs in 1QFY13 (up 1.8% YoY). Of the total, the long term and spot volumes stood at 92.25 TBTUs and 18.98 TBTUs respectively. For the quarter, Petronet’s Dahej terminal operated at 102% of its nameplate capacity.

  • The operating profits for the quarter declined by 13% with margins at 4.7% (as compared to 6.5% in 1QFY13). Despite higher volumes, the operating profits declined due to lower share of spot volumes and lesser marketing margins. The margins on spot cargoes are facing pressure due to lower gas demand in Gujarat and other states (on account of high gas costs). The demand has been especially weak in the power sector. An increase in the internal consumption of gas further led to drop in operating margins.
    Cost summary
    Rs m 1QFY13 1QFY14 Change
    Raw materials 64,972 79,593 22.5%
    as a % of sales 92.4% 94.3%  
    Staff Cost 71 86 21.4%
    as a % of sales 0.1% 0.1%  
    Other expenditure 690 785 13.7%
    as a % of sales 1.0% 0.9%  
    Total expenditure 65,733 80,464 22.4%
    as a % of sales 93.5% 95.3%  

  • The net profits for the quarter declined by 16.8% YoY with margins at 2.7% (as compared to 3.9% in 1QFY13). Apart from lower marketing margins and lower share of spot volumes, the decline was due to 42.7% YoY decline in the other income.

What to expect?

While the capacity utilization at Dahej terminal stood at 102% during the quarter, it is much lower than the levels seen in the past. This is mainly due to sluggish demand of RLNG (regasified liquefied natural gas) on account of high gas prices. The demand is especially weak in the power sector which as per the company management is not even availing APM (administered price mechanism) gas.

The company has achieved financial closure for expansion of Dahej terminal by 5 MMT (million metric tons). Besides, the second jetty at Dahej terminal is likely to be commissioned my March or April next year . While the jetty will not increase the name plate capacity at the terminal, it is likely to result in higher efficiency in handling volumes leading to higher capacity utilization levels.

The Kochi terminal is expected to start commissioning from the month of August and will be supplying gas to Kochi refinery and Fertilizers and Chemicals Travancore (FACT). The Kochi terminal will start operation at very low capacity utilization, constrained by the delay in pipeline connectivity to Bangalore. The tariffs charged for Kochi terminal will be significantly higher than that at Dahej terminal, though it will all depend on the overall demand and customers ability to pay. The management is more focused on higher capacity utilization at the terminal than margins.

For Gangavaram project, the pre project activities have been completed. The company is in the process of getting approvals and environmental clearances are likely to come soon. The management believes that there is a considerable demand in the region from power and fertilizer sector, petrochemical plants and refineries. The project is likely to be completed by early 2017.

A slowdown in demand due to high gas prices is a concern for the company. As per the management, the demand will be there at price level of around Rs 13 or Rs 13.5 per unit of gas. At the current price, the stock is trading at a multiple of 6.0 times our estimated FY15 earnings per share. We believe that the current stock price factors in the absence of short term positive triggers. India is a gas deficit country and demand and supply gap likely to grow. This places Petronet LNG in a sweet spot as the company is leading importer and regasifier of liquefied natural gas/LNG in the country. We reiterate ‘Buy’ on the stock from a long term perspective, provided exposure to it is less than 3% of one's overall portfolio. Regarding target price, we will update subscribers by the end of the month of August.

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