Petronet LNG Q1FY11 Result Update

Petronet LNG reported its Q1Fy11 results and following is a snapshot of the results.

Business Model

The company operates in the field of LNG regassification. The company buys gas from Qatar which has huge facilities to convert Natural gas into Liquefied natural gas by compressing it to 1/600th of the original volume. Petronet has regassification facilities at Dahej wherein it converts the LNG received in ships to Natural gas and it charges a regassification charge for the service it provides. The company deals in three kinds of volumes (a)Contracted volumes (Long term) (b) Spot cargoes (c)Regassification/Tolling volumes. In the first case the company earns the specified margins which is increased 5% every year, and since these margins are out of the purview of PNGRB the company has been taking these increase every year without any regulatory intervention. In the spot cargo apart from the regassification charges the company also earns a certain marketing margin on the gas as it takes the risk and the administrative tasks of placing the gas with the end consumer which in the first case is borne by the off-takers like GAIL, IOCL. In the third case, the company does not buy the gas but only offers the services to an external party. The % margins is not a good way to look at this company because the topline is a function of the natural gas prices and the margins vary hugely depending on the composition of spot volumes, contracted volumes, and the pricing of the spot volumes. Therefore the concept of netback (Revenues/unit - raw material cost per unit) is generally considered a better measure for these companies (This concept is similar to the GRM - Gross refining margin concept in case of oil companies).

Result Review

1. The results were ahead of our estimates on all counts i.e. revenues, ebitda and profit. The major surprise for came at the EBITDA level. The company in the quarter was expected to reply largely on the contracted volumes and the spot volumes were expected to be minimum. The difference between the spot and the contracted volumes being, the contracted volumes have gaurnteed offtake agreements with GAIL, IOCL and BPCL while the spot volumes are on customer requirements. For spot volumes to happen the pipeline capacity should be available to the company. Given the increase in KG basin volumes, the HVJ pipeline capacity was fully utilized and there was little spot volumes that could offtake. This was the premise on which our volume assumptions were based.
2. On the margin front, we had assumed an netback margin (Sales price - cost of raw materail) at Rs25/mmbtu as the company takes a 5% increase each year on its regassification charges.
3. The results however better than what we had anticipated, the company was able to do some spot volumes in the quarter and the netback came in much better Rs. 30.7/mmbtu.
4. The company reported revenues of Rs. 2508cr (down 3.7% Y-o-Y and up 5.4% Q-o-Q), EBITDA came at Rs. 248cr (up 36.3% Y-o-Y and 22.5% Q-o-Q), PAT came at Rs. 111cr (up 7.8% Y-o-Y and 14.5% Q-o-Q)
5. The Y-o-Y decrease in revenues is a result of the following factors
• The sales volumes declined by 7% Y-o-Y to 89.46TBTU as compared to 95.84TBTU in Q1FY10
• The realization increased per mmbtu increased from $5.58/mmbtu to $5.98/mmbtu an increase of 7%
• The rupee appreciated by 3.6% in the following period from 48.4 per dollar to 46.92 per dollar.
6. The netback margins on the sales volume stood at Rs. 30.7/mmbtu up 45% Y-o-Y from 21/mmbtu on account of the 5% hike being taken by the company in regassification margins each year and secondly due to better cost controls and internal usage of gas which has declined due to measures put in place by the company. The netback margins on the regassification services offered by the company stood at Rs. 31.7/mmbtu as compared to 28.5/mmbtu in Q1FY10.
7. Despite a 36.3% increase at the EBITDA level, the same could not come down at the PAT level because of the depreciation expenses which increased 80%. The nature of the business being a high fixed cost business, any incremental volumes help the company at the PAT level. In Q1FY10 out of 95.8TBTU handled 33.1TBTU were from spot cargo and the total utilization level stood at ~100%. But in the current quarter spot volumes were very minimal and the capacity utilization stood at 74%(capacity was enhaced in Q2FY10).

Our Expectation

The spot volumes should revive going forward as the pipeline capacity becomes available to the company for transporting the spot cargo. Moreover the Kochi expansion that the company is undertaking is on schedule and should be done by the last quarter of FY2012. Given the demand supply mismatch and the KG basin ramp up not happening, the demand for spot LNG is likely to go up. At the current levels we recommend a BUY on the stock with a one year target price range of Rs. 92-106.