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Petronet LNG: Strong operating performance - Views on News from Equitymaster

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Petronet LNG: Strong operating performance
Nov 8, 2010

Petronet LNG has announced its 2QFY11 results. The company has reported a 10% YoY decline and % YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues decline by 10% YoY on the back of lower volumes. Volumes decline by 12% YoY.
  • Operating margins improve by 1.5% YoY on the back of lower cost of raw materials (as a percentage of sales). Operating margins during the quarter stand at 8.9%.
  • Net profits increase by 9% YoY during the quarter on the back of a strong operating performance. The bottomline performance was further aided by lower interest costs.
  • During 1HFY11, revenues decline by 7% YoY on the back of a 10% YoY reduction in volumes. Profits however, rise by 8% YoY on the back of a strong operating performance.


(Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Sales     34,067     30,577 -10.2%      60,190      55,837 -7.2%
Expenditure      31,529      27,861 -11.6%       55,835      50,643 -9.3%
Operating profit (EBIDTA)        2,537         2,716 7.1%         4,355         5,194 19.3%
Operating profit margin (%) 7.4% 8.9%   7.2% 9.3%  
Other income             191             186 -2.6%             479             312 -34.9%
Interest             511             495 -3.1%             794             993 25.0%
Depreciation            430             466 8.3%             687            927 35.1%
Profit before tax        1,787         1,941 8.6%         3,353         3,585 6.9%
Tax            580            630 8.6%          1,114         1,160 4.2%
Profit after tax/(loss)        1,207          1,311 8.7%         2,240         2,425 8.3%
Net profit margin (%) 3.5% 4.3%   3.7% 4.3%  
No. of shares              750.0        750.0  
Diluted earnings per share (Rs)                      5.6  
P/E ratio (x)                    21.3  

What has driven performance in 2QFY11?
  • Petronet LNG clocked sales volume of 100 trillion British thermal units (tBtu) in 2QFY11, as compared to 114 tBtus in 2QFY10. Volumes include regasification volumes of 0.3 tBtu during the quarter.

  • 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 spread 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 expand by 1.5% on the back of lower raw materials costs, which fell by 1.5% YoY (as a % of sales) during 2QFY11 and by 12% YoY in absolute terms.

    Cost breakup...
    (Rs m)  2QFY10   2QFY11  Change
    Consumption of raw materials       31,189     27,547 -12%
    % of sales 91.6% 90.1%  
    Staff cost                41               53 30%
    % of sales 0.1% 0.2%  
    Other expenditure             299             261 -13%
    % of sales 0.9% 0.9%  
    Total cost      31,529      27,861  
    % of sales 92.6% 91.1%  

  • Net profits rise by 9% YoY on the back of a strong operating performance coupled with lower interest charges.

  • During the first half ended September 2010, revenues decline by 7% YoY, while net profits rise by 8% YoY. At the operating level, the company recorded a 19% YoY rise in profits. The increase in net profits would have been higher had it not been for the 35% YoY decline in other income. In addition, higher interest and depreciation costs also slow down the rise in profits.

What we expect?
At the current price of Rs 120, the stock is trading at a multiple of 21 times its trailing twelve month 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 expensive at the current juncture.

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