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Petronet LNG: Operational challenges persist - Views on News from Equitymaster
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Petronet LNG: Operational challenges persist
Aug 4, 2015

Petronet LNG has announced results for the quarter and the year ending June 2015. The company has reported a 18% year on year (YoY) decline in the topline while net profits for the quarter grew by 58% YoY. Here is a brief analysis of the company's performance.

Performance summary
  • Revenues decline by 18.3% YoY during the quarter.
  • The operating profits (excluding other operating income) for the quarter declined by 20.1% YoY while margins for the quarter stood at 2.5%, versus 2.6% in the corresponding quarter last year.
  • The net profits for the quarter grew by 58% YoY despite a poor operating performance on account of lower tax outgo and decline in the interest expense.
  • Tax expense for the quarter is net of reversal of Rs 723 m
  • The company has appointed Mr. Prabhat Singh as CEO and MD in place of Dr. A. K. Balyan. Mr. Singh is currently working as Director (Marketing) of GAIL (India) Ltd.

Standalone performance summary
(Rs m) 1QFY15 1QFY16 Change
Sales 100,647 82,251 -18.3%
Other operating income 961 1521 58.2%
Expenditure 98,031 80,161 -18.2%
Operating profit (EBDITA) 2,617 2,090 -20.1%
EBDITA margin (%) 2.6% 2.5%  
Other income 353 333 -5.6%
Interest (net) 784 612 -22.0%
Depreciation 771 801 3.9%
Profit before tax 2,376 2,531 6.5%
Pretax margin (%) 2.4% 3.1%  
Tax 810 56 -93.0%
Profit after tax/(loss) 1,566 2,475 58.0%
Net profit margin 1.6% 3.0%  
No. of shares (m)   750  
Diluted earnings per share (Rs)*   13.0  
TTM PE*   14.8  
* On a trailing 12 months basis

What has driven performance in 1QFY16?
  • Revenues for the quarter declined by 18% YoY. The volumes for the quarter stood at 128 TBTUs, down around 8% YoY but higher on a sequential basis. While long term LNG volumes have declined significantly (down 30% YoY), the spot volumes and regas volumes were higher both on a year on year basis and sequentially. RLNG off take under the long term sales contract with off takers was around 68% of the quantity planned for the first half of the current calendar year. However, the take or pay obligations will be decided after the close of the calendar year as per the contractual provisions. The long term volumes have been impacted as long term gas price is available at a premium to spot gas. As per the management, the capacity utilization for Dahej terminal stood at around 98.6%.

    Cost breakup
    (Rs m) 1QFY15 1QFY16 Change
    Cost of materials consumed 96,995 79,080 -18.5%
    as a % of sales 96.4% 96.1%  
    Employee expenses 122 150 23.1%
    as a % of sales 0.1% 0.2%  
    Other expenses 913 931 2.0%
    as a % of sales 0.9% 1.1%  
    Total expenses 98,031 80,161 -18.2%
    as a % of sales 97.4% 97.5%  

  • Kochi terminal remains hardly utilized as the associated pipelines are not ready yet. However, it is providing service to Kochi refinery and fertilizer plant (FACT) and engaged in other operations such as loading, reloading, bunkering... overall volumes at Kochi were 6.11 TBTU which includes reload cargo.

  • The net profit for the quarter looks significantly higher due to tax reversal of earlier provisioning of taxes. The depreciation for the quarter was up 3.3% YoY while interest expense declined by 22% YoY. While the company witnessed degrowth at EBITDA level (on a YoY basis), a decline in the interest cost led to the growth in the pretax profit. At net income level, the Kochi terminal has incurred a loss of around Rs 31 crore. However, it has generated cash profit for the quarter.
What to expect?
As per the management, Kochi terminal has performed much better than last year and generated cash profit for the year (adding depreciation). However, this was mainly due to higher reload income and may not be recurring in future. Utilization for the Kochi terminal during the quarter stood at 6% to 7%.

The improvement in the pre tax income has been on account of lower interest costs.

As per the management, Dahej expansion is on track and is 65% completed. The total expansion is likely to be done by the end of 2016. The company has already spent Rs 14 bn. The amount further likely to be spent is around Rs 10 bn. Overall long term borrowing for the company is around Rs 27 bn for Dahej and Kochi

As per the management, whatever take or pay liability arises will be crystallized at the end of the year. The management has declined to reveal any updates regarding negotiation with Qatar, if any, for confidentiality reasons. As such, offtake risks and concerns on low capacity utilization remain to some extent in the long term Ras Gas contract. Further, there is still no clarity regarding gas pipeline for Kochi terminal

At the current price of Rs 192, the stock is trading at a price to earnings (PE) multiple of around 14.8 times. We maintain our view to avoid the stock at current prices.

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