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Petronet LNG: Volumes drive the show - Views on News from Equitymaster
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Petronet LNG: Volumes drive the show
Oct 27, 2009

Performance summary
  • Topline grows by 106% YoY during 2QFY10 on the back of a 52% jump in volumes.
  • EBITDA margins decline to 7%, from 11% in 2QFY09 on the back of higher raw material costs.
  • Other income rises by 7% during 2QFY10.
  • Bottomline registers a growth of 17% YoY due to higher volumes despite erosion in operating margins.


Standalone financial snapshot
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales 16,549 34,067 105.8% 33,008 60,190 82.4%
Expenditure 14,726 31,529 114.1% 29,267 55,835 90.8%
Operating profit (EBDITA) 1,823 2,537 39.2% 3,740 4,355 16.4%
EBDITA margin (%) 11.0% 7.4%   11.3% 7.2%  
Other income 178 191 7.4% 344 479 39.2%
Interest 241 511 111.9% 492 794 61.5%
Depreciation 258 430 66.7% 514 687 33.7%
Profit before tax 1,501 1,787 19.0% 3,079 3,353 8.9%
Tax 468 580 24.1% 989 1,114 12.6%
Profit after tax/(loss) 1,034 1,207 16.8% 2,090 2,240 7.2%
Net profit margin (%) 6.2% 3.5%   6.3% 3.7%  
No. of shares (m)         750.0  
Diluted earnings per share (Rs)*         7.1  
Price to earnings ratio (x)*         10.3  
*On trailing twelve months earnings

What has driven the performance in 2QFY10?
  • Petronet LNG clocked sales volume of 113 trillion British thermal units (tBtu) in 2QFY10, higher than the 2QFY09 volumes by 51%. It also achieved regasification volumes of 0.4 tBtus during the quarter.

  • During the quarter, Petronet LNG has executed a long term contract with Mobil Australia Company for supply of around 1.5 m tonnes per annum of LNG from Gorgon Project, Australia. The 20 year supply will be delivered to the terminal under construction at Kochi. The terminal is expected to be mechanically commissioned by 31st December, 2011.

  • The availability of domestic natural gas is expected to go up in the long term. Imported LNG is a more expensive option compared to domestic natural gas transported by pipeline. 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.

  • EBITDA margins have declined by 3.6% on the back of higher raw materials costs, which increased by 4.5% YoY (as a % of sales) during 2QFY10. As a result of the commissioning of expansion facilities in July 2009, additional depreciation of Rs 174 m and interest of Rs 227 m have been accounted for during this quarter.

    Cost break-up
    (Rs m) 2QFY09 2QFY10 Change
    Raw materials 14,416 31,189 116.4%
    % sales 87.1% 91.6%  
    Staff cost 36 41 12.9%
    % sales 0.2% 0.1%  
    Other expenditure 274 299 9.1%
    % sales 1.7% 0.9%  
    Total cost 14,726 31,529 114.1%
    % sales 89.0% 92.6%  

  • 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 will ensure that Petronet LNG’s power will be the cheapest among all gas-based projects in India.

What to expect?
Going forward, the management expects to maintain volumes growth. Petronet recently doubled the capacity of its Dahej terminal to 10 m tonnes per annum (mtpa). It is building another 2.5 m tonnes a year plant at Kochi. The company gets 5 m tonnes a year from RasGas under a long-term LNG deal, and that will be raised to 7.5 m tonnes from the last quarter of 2009. It will receive 6 additional cargoes from RasGas this year in addition to the long-term and short-term contracts. It has also been trying to procure supplies from Australia's Gorgon project and from Papua New Guinea.

At the current price of Rs 73, the stock is trading at a multiple of 10.3 times its trailing 12 months earnings. We believe the implications of the impending shift in the supply structure of gas in India will be negative for the company, and as such the stock is fairly valued at the current juncture.

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