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Petronet LNG: Sound business model but…
Sep 4, 2006

Natural gas accounts for roughly 8% of the energy requirement of the country (as against the world average of more than 25%) This is on a lower side considering the fact that it is efficient and environment friendly. Lower share in energy matrix is due to shortfall in supply of natural gas. However, Indian government has been trying hard to enhance the supply of natural gas in the country. The various options being explored by the government include transnational gas pipelines (Iran –Pakistan pipeline and Myanmar Pipeline), facilitation of exploration on the domestic front and making efforts at increasing the sourcing of LNG. Against this backdrop, let us have a look at Petronet LNG, the company, which imports and sets up LNG terminals in the country.

About the company
Petronet LNG Limited (PLL) is promoted by four Navratna PSUs, namely BPCL, ONGC, GAIL and IOC, each holding 12.5% stake each. PLL is engaged in the business of regasification of LNG. It has its regasification terminals at Dahej with a capacity of 5 million metric tonnes per annum (MMTPA). It is also building a regasification terminal with a capacity of 2.5 MMTPA at Kochi.

What is natural gas and LNG?
Natural Gas is predominantly methane, but also present in varying proportions are smaller amounts of ethane, propane and butane. The technical and economic problems of running natural gas pipelines over very long distances directly contributed to the creation of international LNG business (due to bulky nature, amount of natural gas transported through pipelines is just one fifth of crude oil that can be transported, everything else being constant). However, if the gas is cooled at minus 160.5 degree C, it becomes liquid and more compact, occupying just 1/600th of its gaseous volume. This makes transportation of natural gas easier between locations that are quite far from each other. The liquefied natural is then transported through specially designed ship. At the receiving end the liquefied natural gas is converted into natural gas and the converted output is termed as regasified natural gas (R-LNG).

Business model of PLL
PLL has an agreement with RasGas Qatar to source 7.5 MMTPA for a term of 25 years, price of USD 2.53 per mmbtu (linked to the price of USD 20 per barrel). The revision clause is linked from FY09 with Japanese cocktail crude prices (JCC). PLL has set up India' s first LNG receiving and regasification terminal at Dahej, Gujarat. The Dahej LNG Terminal has been designed to handle a nominal capacity of 5 MMTPA initially, which is equivalent to 20 MMSCMD (million standard cubic meters per day) of natural gas, with a provision for expansion up to 10 MMTPA. The strategic location of the Dahej helps to satisfy the enormous demand of power, fertilizer and other users located in the industrial belt of the Gujarat. It is also building another LNG terminal at Kochi with an installed capacity of 2.5 MMTPA and will also have a provision to increase it to 5 MMTPA.

Currently 5 MMTPA is being supplied to the Dahej terminal and remaining will be supplied from CY09. The regasified LNG is marketed by three of its promoters, GAIL India, Indian Oil and Bharat Petroleum. GAIL markets 60 per cent of Petronet’s total output through its HBJ trunk pipeline to buyers from various industries, including power. Petronet has a low risk business model as the company receives fixed regasification charges for the natural gas regasified. Petronet has 25-year take or pay contracts for supply of gas with RasGas as also for onward sale with its marketers, Gail, Indian Oil and Bharat Petroleum.

Financial performance
Company commenced its operations at the Dahej terminal in April 2004. In FY05, 125 TBTUs (thousand British thermal units) were sold and with the doubling of capacity in FY06, the sales increased to 247 TBTUs. Realisations for FY05 and FY06 stood at Rs 156 m per TBTU. Company is expanding capacity at its Dahej terminal with a long-term funding of Rs 12.3 bn. Internal accruals to the tune of Rs. 3.7 bn will also be used for the expansion. Company’s profitability is likely to come under pressure in view of the rising interest costs and higher depreciation outgo.

Financial snapshot…
(Rs m) 1QFY05 2QFY05 3QFY05 4QFY05 1QFY06 2QFY06 3QFY06 4QFY06 1QFY07
Net sales 3,884 5,021 5,315 5,236 9,212 9,445 10,297 9,417 10,191
Expenditure 3,668 4,666 4,835 4,778 8,121 8,325 9,080 7,965 8,882
Operating profit(EBDITA) 215 355 480 457 1,091 1,120 1,217 1,453 1,309
EBDITA margins 5.5% 7.1% 9.0% 8.7% 11.8% 11.9% 11.8% 15.4% 12.8%
Other income 28 19 50 36 42 28 57 67 53
Interest expenses 218 285 286 305 296 288 267 265 266
Depreciation 221 249 249 249 250 254 254 251 254
Profit before tax (196) (161) (4) (61) 587 607 753 1,004 841
Tax - - - 140 196 206 256 342 280
Profit after Tax (196) (161) (4) 79 391 400 496 661 561
Net profit margin -5.0% -3.2% -0.1% 1.5% 4.2% 4.2% 4.8% 7.0% 5.5%
No. of shares (m) 750 750 750 750 750 750 750 750 750
EPS (0.26) (0.21) (0.01) 0.11 0.52 0.53 0.66 0.88 0.75

What to expect?
The stock currently trades at Rs 51, a price to earnings of 17 times its annualised 1QFY07 earnings and 14 times its book value. Although the business risk associated with its operations is on the lower side due to fixed margins, upside from the current levels is fairly limited, as sourcing additional LNG will prove to be a big challenge for the company. Also, its investments in capacity expansion are likely to yield desired results only after 2-3 years. Thus, we believe the stock is expensively priced at the current juncture.

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