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Petronet: Margin pressure continues - Views on News from Equitymaster
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Petronet: Margin pressure continues
Oct 20, 2008

Performance summary
    • Topline decreases by 1% YoY during 2QFY09 on the back of lower volumes.

    • EBITDA margins decline to 11%, from 12.8% in 2QFY08.

    • Other income rises by 46% during 2QFY09.

    • Bottomline registers a decline of 10.5% YoY as a result of lower topline and erosion in operating margins.

    Standalone financial snapshot
    (Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
    Net sales 16,705 16,549 -0.9% 32,215 33,008 2.5%
    Expenditure 14,562 14,726 1.1% 28,023 29,267 4.4%
    Operating profit (EBDITA) 2,143 1,823 -15.0% 4,193 3,740 -10.8%
    EBDITA margin (%) 12.8% 11.0%   13.0% 11.3%  
    Other income 121 178 46.4% 237 344 45.1%
    Interest 261 241 -7.5% 517 492 -4.9%
    Depreciation 258 258 0.3% 512 514 0.4%
    Profit before tax 1,747 1,501 -14.1% 3,401 3,079 -9.5%
    Tax 592 468 -21.0% 1,166 989 -15.1%
    Profit after tax/(loss) 1,155 1,034 -10.5% 2,235 2,090 -6.5%
    Net profit margin (%) 6.9% 6.2%   6.9% 6.3%  
    No. of shares (m)         750.0  
    Diluted earnings per share (Rs)*         6.1  
    Price to earnings ratio (x)*         6.4  
    *On trailing twelve months earnings

    What has driven the performance in 2QFY09?
    • Petronet LNG clocked a sales volume of 75 trillion British thermal units (tBtu) in 2QFY09, lower than the 2QFY08 volumes by 8.23 tBtu. The sales volume was lower during the quarter as one high-pressure pump was de-commissioned for major repair & maintenance work. It has been re-commissioned on October 04, 2008 and now the terminal is operating at full capacity.

    • The availability of domestic natural gas is expected to go up in the future. However, LNG will remain an attractive option if the timing and quantum of new domestic supplies spreads out over the next few years giving sufficient time for domestic demand to catch up. Moreover, the company plans to import only if it has back-to-back sell agreements.

    • The average cost of gas procured by Petronet LNG under long term contracts worked out to US$ 4.5 per million British thermal units (mBtu) in FY08. For FY09, the company expects the cost to remain below US$ 5 per mBtu. Any procurement from the spot markets costs around US$ 17 to 18 per mBtu. As the company generally procures under long-term contract (such as the new 3.5 mtpa contract for 10 years), it expects to get supplies at competitive prices. Moreover, it has back-to-back long-term sell arrangements, thus preserving its margins.

    • EBITDA margins have declined on the back of higher raw materials costs, up 1.5% as a % of sales during 2QFY09 YoY.

    • The company proposes to set up a 1,200-mw power plant in Dahej near its LNG terminal at a capital cost of Rs 35 bn. It has inherent strategic advantages for entering the power generation business, thanks to the availability of 'cold energy.' LNG is transported and stored at temperature as low as minus 160 degree celsius. Hence, when it gets regasified, it brings down the temperature of water to zero. This water is then used for cooling in turbines improving their efficiency, extracting 1,200 mw out of 1,050 mw turbines. Besides the savings of 12.5% value-added tax on fuel, this will ensure that Petronet LNG's power will be the cheapest among all gas-based projects in India. The company is currently waiting for the state government to allocate land to set up the power plant.

    What to expect?
      The international LNG market will witness new capacities to the tune of 47 mtpa being added between June 2008 to March 2009, including 16.5 mtpa coming from RasGas and 10 mtpa from Sakhalin.

      Going forward, the management expects to maintain volumes growth. The new expansion to be in place by the 3QFY09, will add more than double the capacity up to almost 12.5 million metric tonnes per annum (mtpa). The company has already started awarding contracts for the 5-mtpa Kochi LNG terminal, which is scheduled to come up by end of 2011. It is hopeful of supplies from Exxon Mobil¡¦s share from the Gorgon LNG project in Australia for the LNG supply to Kochi.

      At the current price of Rs 39, the stock is trading at a multiple of 6.4 times its trailing 12 months earnings. Although we believe the implications of the impending shift in the supply structure of gas in India will be negative for the company, the price has corrected downwards to reach attractive levels.

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