Listed companies do take note of constructive criticism it appears. The annual report of Petronet LNG (liquefied natural gas) for 2009-10 had taken parsimony to new heights -about which I had commented on. It is a relief to see that the annual report of 2010-11 has undergone a serious face lift. The company owns and operates the country's first and largest LNG terminal at Dahej, Gujarat. The directors state that the company's singular focus is to catalyze the growth of the Indian gas sector through enhancing the gas supply to satisfy the needs if the existing consumers, to develop new customers and to further leverage the potential of imported LNG in the Indian market.
Going at a canter
The company is going about its business at a canter and for a PSU it is surprisingly agile to boot. A PSU because its four principal PSU promoters - ONGC, GAIL, BPCL and IOC control 50% of the voting stock. It also has two non interfering foreign promoters - GDF and The Asian Development Bank, who between them hold another 15.2% (10% + 5.2%) of the outstanding equity of Rs 7.5 bn. For the uninitiated, GDF Suez S.A. (formed by the merger of Gaz De France and Suez) is a French MNC energy company, which is into electricity generation and gas distribution. It is currently ranked as the world's largest utility company.
Petronet LNG is a big operation alright - at year end March 2011, this 13 year old company had gross assets to the tune of Rs 83 bn, including a gross block of Rs 58 bn. Included in this listing is its investments (some of it of the revenue unproductive variety) of the book value of Rs 11.6 bn. In the last two accounting years it added a little over Rs 19 bn to its gross block, but the vast bulk of this spending would have gone towards creating the green field capacity at its Kochi LNG terminal. For the matter of record the company has to date spent Rs 22 bn on its upcoming facility at Kochi. On completion this facility will boast a capacity to re-gasify 5 million metric tonnes of liquefied natural gas per year. This facility is expected to be commissioned in the third quarter of 2012.
For the purposes of comparison, the present facility at Dahej imported 125 cargoes representing 8 MMPTA of LNG during the year. It also provided re-gasification services to 11 LNG cargoes to other two other companies including to its co-promoter GAIL. The company currently has a contract with RasGas of Qatar for an annual supply of 7.5 MMPTA of LNG gas.
Managing its cash flow admirably
Inspite of its massive investment into as yet unproductive capital assets at its Kochi facility it has most admirably managed its cash flow in the last two years. The cash flow generated from operating activities in either year was just adequate to fund the spending on gross block addition. As a matter of fact the total additional borrowing in the two years cumulatively was limited to Rs 9.4 bn.
To be fair however the company has its work cut out for it. It buys its raw gas from a single supplier by and large at a contracted price and sells the re-gasified gas to its principal shareholders also at a contracted price. It operates on razor thin margins and thus the trick of the trade obviously is to sell more volumes so that the margins ante up. For example in 2009-10 it bought gas a rate of Rs 0.25 per British Thermal Unit (TBTUs) and then sold it for Rs 0.28 per unit. In 2010-11 it bought gas at the rate of Rs 0.29 per unit and then sold the gas at Rs 0.32 per unit. But the volumes are so large - in 2010-11 it bought a total of 4.13 TBTUs against 3.85 TBTUs in the preceding year, that it was enough to bring home the bacon. The company generated total sales of Rs 131 bn in 2010-11 against Rs 106 bn previously, and recording a gross margin of Rs 14.6 bn against Rs 10.8 bn previously. That is to say revenues were up 24%, while the gross margin grew a tad faster at 35% (other income plays a very niggardly role in the overall scheme of things).
It's a cash down business
It literally pays cash down for what it buys - the creditors at year end (trade creditors have not been separately quantified) is miniscule relative to the value of purchases, and trade debtors too are pared to the bone. The three buyers of its produce-Indian Oil, Bharat Petroleum and Gas Authority of India -each of them at year end owed the company around 6% of their annual purchases. In other words what we are witness to here is a neatly packaged operation that requires no purchase department, or a sales department for that matter, with no question of making any year end provisions for bad and doubtful debts on sales either. This company must rank as one of the few in the Indian corporate firmament which can boast of such an achievement. All perfectly tuned down to the last T.
It enforces a strict control over other administrative costs - the company spends not more than a farthing on salaries in a manner of speaking. Add to this the outgo on interest charges (an unquantifiable percentage of the total interest levy is obviously debited to capital account due to the funding costs of the Kochi unit etc).To this factor in the depreciation element. The company was able to record a profit before tax of Rs 9 bn. The pre-tax profit was 51% higher than previously. If running a business was as easy as this, life would indeed be a piece of cake.
Heavily invested in securities
As I stated earlier the company is also heavily invested in securities-equity and debt. It has plonked down Rs 733 m in a venture called Adani Petronet Dahej Port Ltd. This investment accounts for 26% of the total equity of the project. This venture is implementing a solid cargo port at Dahej which will have the facility to import/export 15 MMPTA of bulk products like coal, steel and fertilizer. This facility may have already gone on stream. But any direct returns will be very long term in nature.
Its investments in debt securities are a seeming paradox. At year end it has debt security investments of the value of Rs 10.4 bn, up from Rs 4.2 bn previously, or a rise of Rs 6.2 bn. Now the interest bearing debt rose from Rs 24.9 bn to Rs 32.2 bn or an increase of Rs 3.9 bn over the same period. It is safe enough to surmise that the increase in debt is directly the consequence of the increase in its investment portfolio. The company earned an interest of Rs 247 m on its debt securities against Rs 167 m previously. The percentage return on its debt investment is unknown, as is the percentage payout on its debt. But presumably the company is turning a profit on this exercise.
The company also purchased and sold debt investments on a massive scale during the year. It bought instruments to the tune of Rs 98 bn and sold instruments to the tune of Rs 92 bn. What exactly was the purpose of this exercise is not known as the company does not appear to have made any revenue gains in the process. Atleast the 'other income' schedule does not account for any income from this portfolio churning. Hopefully it has not been burdened by any loss in the process!
A winner all the way
But whatever may be the minor pitfalls, this company is a winner all the way by any yardstick. The current year should see a much larger volume of business from its present facility at Dahej and come 2012 the green-field facility at Kochi will be up and about. The new unit will not face any start up hiccups as it is basically a plane Jane facility, which merely re-gasifies the LNG that it unloads from the carrier. What the company really has going for it is the virgin territory to market the gas with a pent up demand to boot, and the purchase price and the sale price decided well in advance. The additional leg up is the best seller - it does not have to factor in bad and doubtful debts provision.
Disclosure: I hold 500 shares in Petronet LNG.
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.