PETRONET LNG: STEPPING ON THE GAS

In view of healthy cashflows and growing investments, Petronet LNG looks attractive on a long term horizon

RAMKRISHNA KASHELKAR ET INTELLIGENCE GROU P

Beta: 0.84
Institutional Holding* 11.43%
Dividend Yield: 2.8%
P/E: 9.2
M-Cap: Rs 3975 cr
CMP: Rs 53

PETRONET LNG (PLNG) is India’s largest importer of liquefied natural gas (LNG) representing nearly 25% of India’s total natural gas consumption in FY09. The company is promoted by ONGC, Gail India, Bharat Petroleum and Indian Oil, which together hold 50% of its equity capital with strategic stakes held by Gaz de France (10%) and Asian Development Bank (5.2%).
PLNG set up its first LNG import terminal at Dahej in Gujarat with 5 million tonne per annum (MTPA) capacity in 2004. The company has entered into a 25-year contract with RasGas of Qatar for import of 5 MTPA of LNG, which will be scaled up to 7.5 MTPA from September 2009. The company has entered into back-to-back sell agreements with the promoter group companies, which market the regassified LNG (RLNG) to domestic customers. This arrangement not only insulates PLNG from any marketing risks, but also cuts down any requirement of working capital. The company earns a small fixed charge on regassification of LNG, which is revised annually.

Growth Drivers:
The company is set to benefit both from incremental volumes as well as increase in its conversion charges. The company has doubled the capacity of its Dahej LNG terminal to 10 MTPA and is currently in the process of commissioning the additional capacity in a phased manner. Similarly, its regassification charges were raised by 5% starting January 1, ‘09 to Rs 30 per MMBTU. The company has also tied up another six months of LNG supplies with BP for the Dabhol Power project. At the same time, import of spot cargos too is expected to rise with LNG prices coming down heavily.
Despite additional gas starting to flow out of RIL’s eastern offshore oil fields, India still remains undersupplied in terms of natural gas availability. This gives ample scope for PLNG to utilise its expanded capacities, provided LNG is imported at a competitive price. Globally the supply of LNG is set to increase over next few years with a number of projects currently under construction, which increases the possibility of the company striking a long-term supply deal in near future. The company has also taken up 26% stake in a dry-bulk cargo port at Dahej, the first phase of which is likely to complete by end 2009. PLNG is also contemplating setting up power plants near its regassification projects in Dahej, as well as Kochi, once it is ready.

Financials:
With the conversion charges fixed, the company’s revenues and profits depend directly on the volume of LNG handled. Over last four years the company has continuously increased the volumes, resulting in nearly 130% utilisation of its nameplate capacity of 5 MTPA. However, the first nine months of FY09 witnessed stagnation in volumes due to difficult economic conditions. The company has brought down its debt-to-equity ratio consistently from FY05 to FY08, while improving the interest coverage ratio. Its sales have grown at a cumulative annual growth rate of over 40% over last five years, while the loss of Rs 28 crore in FY04 turned into a profit of Rs 475 crore in FY08. Being a capital intensive company, PLNG has been providing over Rs 200 crore annually towards interest and depreciation. With the commissioning of additional capacities, these numbers will double in coming quarters.

Valuations:
At the current price of Rs 53, the scrip is trading at 9.2 times its earnings for the 12-month period ended December 2008. We expect the company’s profits to grow at 20% in FY2010, which translates in a forward P/E of 7.2. The company’s last year’s dividend of Rs 1.5 per share is expected to continue, which gives a 2.8% dividend yield.

Risk Factors:
Sourcing a long-term LNG supply, which will guarantee optimum capacity utilisation, remains the key concern for the company’s future growth prospects. PLNG also runs execution risks towards its new projects.
EXPANDING TO GROW Petronet LNG has doubled capacity at its Dahej terminal to 10 MTPA, which will be fully operational by end-May The company annually generates over $100 million of cashflows The company has secured 1.5 million tonne of LNG supplies for Dabhol Power project From September 2009, PLNG’s imports from RasGas will jump 50% to 7.5 million tonne per annum Interest and depreciation are the largest costs for the company, which will double in FY 2010 Spot LNG rates have crashed substantially to $5 per MMBTU – nearly 70% below last year’s peak due to global recession and fall in demand for LNG Thanks to the back-toback purchase and sale arrangements PLNG needs no working capital Signing a long-term LNG supply deal at attractive price will be a key trigger for Petronet LNG’s growth

RIL Q4 net may decline

RELIANCE Industries (RIL) is likely to post a second consecutive dip in net profit in the March quarter when it announces financial results on Thursday evening, according to three analysts ET spoke to. They said profits for the fourth quarter is likely be impacted by a fall in realisations across product categories and the shutting down of its polypropylene unit in January and February.
These analysts believe that the country’s largest company by market capitalisation is likely to post a 9% dip in net profit year-on-year to Rs 3,600 crore for the March quarter. However, the financial performance in the fourth quarter may be slightly better than the December quarter which saw a 9.8% dip in its net profit, thanks to improved refinery margins.
On the future outlook, the analysts said RIL is expected to grow significantly in the coming quarters as it has started pumping gas from its Krishna Godavari (KG) basin this month. But sales for the March quarter are expected to be lower by 15.4% y-o-y to around Rs 31,550 crore due to fall in refinery capacity utilisation.
An analyst with a leading international brokerage told ET, “RIL has cleared all its inventories this quarter at a good price. I believe the company will be able to post better gross refinery margins (GRMs) in the March quarter compared to the immediate preceding quarter but lower than the corresponding previous period’s $15.4 a barrel.
Overall, the company is expected to register a 9% decline in net profit.” The analyst said RIL is likely to post GRMs — the difference between the product prices and crude costs — of $12 a barrel in the March quarter, better than the December quarter’s $10 a barrel.
Amitabh Chakraborty, president (Equity) with Religare Securities said RIL might end-up surprising the market. “Our estimates peg RIL’s Q4 profit at Rs 3,560 crore. However, the short covering on Wednesday at the RIL counter probably indicates that the company will surprise the street.”
RIL is expected to benefit from the commissioning of the 5,80,000 barrels of oil per day new refinery which has already started exporting products. Shares of RIL on BSE gained 1% or Rs 10 to close at Rs 1,716 over the previous day’s close.
The stock has lost 6% in the last one week. It has gained 28% in the last month.

Refiners in good shape as oil rules steady

But For Upstream Cos, Low Oil Prices & Stagnant Output May Bring Down Profits & Sales

OIL marketing firms and standalone refiners are tipped to do well in the March 2009 quarter, which saw oil prices stabilising around $50 per barrel after plunging to below $35-levels in December. However, the quarter may turn out to be a disappointing one for upstream companies such as government-run ONGC, which may see low oil prices and stagnating output affecting their sales and profit numbers.
Oil marketing companies will post the biggest gains over the year-ago period, as their marketing operations were profitable for a major part of the quarter. Low crude prices prevailed in the quarter will see standalone and private sector refiners posting good numbers. The benchmark WTI crude oil prices averaged at $42 per barrel for the quarter, which was 57% lower compared with the prices prevailed in the year-ago period.
Fuel marketing firms such as Indian Oil, BPCL and HPCL will see a jump in profitability in the March quarter, as their refining operations will remain profitable unlike the two previous quarters when inventory losses played spoilsport. Also, they were selling auto fuels at positive margins during most part of the quarter, thanks to the crash in crude oil prices.
India’s largest producer of crude oil and natural gas, Oil & Natural Gas Corporation (ONGC), will have a disappointing quarter. Stagnating oil production from many of its ageing fields will also affect ONGC, which is likely to report a 7% decline in domestic production in the quarter. However, these negative factors will get partially offset by a major depreciation in rupee value, which at Rs 49.8 against the dollar was nearly 25% weaker since the year-ago period.
Oil refiners such as MRPL, Chennai Petroleum, Reliance Industries and Essar Oil are likely to see pressure on margins in dollar terms. However, unlike the preceding quarter, they won’t have inventory losses this quarter. They too will benefit from the rupee depreciation as the same dollar per barrel gross refining margin would translate in more rupee profits. However, India’s largest company Reliance Industries is set to report a fall in sales as well as profits for the quarter due to the maintenance shutdown at its refinery in January-February period.
In natural gas segment, the results for the March quarter are likely to be mixed. The supply of natural gas in the country remained more or less stagnant during the quarter. Gail is likely to maintain its growth momentum, thanks to additional gas from Panna, Mukta, Tapti (PMT) fields.
A rise in naphtha prices will see a number of gas consumers, who had shifted to naphtha in the December 2008 quarter, shift back to natural gas in the March quarter. As a result, smaller players such as Gujarat State Petronet (GSPL) and Gujarat Gas will see an improvement in gas volumes.

Rallis India: Well positioned

Robust performance continued at Rallis India, the agrochemicals company belonging to the Tata stable. The company reported net profit of Rs 72 crore for the year ended March 2009. But this appears to be lower on a y-o-y basis, despite strong operating growth, due to the onetime gain of Rs 87 crore in the earlier year following a land sale. For the year ended March 2009, the company reported 23% growth in net sales to Rs 856 crore and a substantial improvement in operating profit margins, leading to a 67% jump in the operating profits. Thanks to a muted growth in interest and depreciation costs, the pre-tax profits were 83% higher against the previous year. Rallis India’s strong operating performance was enabled by a jump in its international business, which now contributes nearly one-third of its revenues. The company secured long-term contracts from key customers with revenue potential of Rs 1000 crore over the next five years. In the domestic market, it was able to combat the spurt in costs through a series of price hikes totalling nearly 15% in FY09. Nearly 29% of the company’s revenues came from innovative products launched in the past four years.
For the quarter ended March 2009, the company reported 25% higher net profit at Rs 10 crore on 26% growth in net sales at Rs 187 crore. It was also able to improve its operating margins in the fourth quarter, which is typically its slowest quarter in a fiscal. The company declared a dividend of Rs 16 per share for FY 2009, which translates into a dividend yield of 3.3% on Wednesday’s closing price of Rs 492. It had paid the same dividend last year as well, albeit due to the extraordinary gains.

RASHTRIYA Chemicals & Fertilisers: A Fertile Future

With more natural gas becoming available, Rashtriya Chemicals & Fertilisers has short-term as well as long-term triggers for profit growth

RASHTRIYA Chemicals & Fertilisers (RCF) could emerge as a key beneficiary of the rising availability of natural gas in India. As additional capacities become available, dependence on subsidies will decrease. All this, along with positive policy changes, make RCF an attractive bet for a long-term investor.

Business:
Mumbai-based RCF is one of India’s largest producers of fertilisers and industrial chemicals. It has two operating locations, one at Trombay near Mumbai and the other at Thal in Raigarh district, and is India’s third-largest fertiliser producer. It makes urea and complex fertilisers and has a combined capacity of 25.1 lakh tonnes per annum (TPA). It also produces chemicals such as methanol, methylamines, nitric acid and ammonium bicarbonate. RCF also imports and sells urea, muriate of potash (MoP) and diammonium phosphate to support its product portfolio.

Growth Drivers:
RCF is set to receive an immediate boost from increased availability of natural gas — it is to get 3.05 million cubic metres per day (mcmd) of gas from Reliance Industries, which will enable it to restart its 3.3-lakh-TPA urea plant at Trombay by this month-end and cut down naphtha consumption at its Thal plant. By September, it will also restart its 3.2-lakh-TPA complex fertiliser plant at Trombay, which was closed due to an accident. RCF’s Rapidwall project to produce low-cost pre-fabricated walling systems from gypsum produced at Trombay will start operations by end-April and the company is also revamping its methanol plant to add more capacity and cut energy consumption. All these initiatives will raise output, raising turnover and boosting bottomline. Lower costs will bring down its subsidy bill. The lower dependence on government payments, typically made two to three months after actual production, will help cut RCF’s short-term borrowings and interest costs. In the long run too, RCF has various expansion projects planned to drive growth. It has set up a joint venture with Rajasthan State Mines & Minerals (RSMML) to set up a 3-lakh-TPA di-ammonium phosphate (DAP) fertiliser plant in Rajasthan at a total estimated cost of Rs 900 crore. This project involves a 2:1 debtequity ratio. The company is also de-bottlenecking its Thal plant to scale up urea manufacturing capacity to 20 lakh TPA by mid-2010 from 17 lakh TPA now. At Thal, it is also considering a 1.2-million-TPA brownfield urea expansion. RCF has also entered into a joint venture with Gail for a coal-bed-methane project and with National Fertilisers and KRIBHCO for revival of a defunct fertiliser plant.

Financials:
RCF’s net sales have risen at a cumulative annualised growth rate (CAGR) of 20.5% between 2004 and 2008. In the same period, its annual profit stagnated at around Rs 150 crore. However, the company seems to be back on the growth path and posted a 61% rise in net profit at Rs 172 crore for the ninemonth period ended December ‘08. For FY08, the company’s debt-to-equity ratio jumped to 0.75, as it had to borrow nearly Rs 900 crore more towards working capital because of rising dependence on government subsidy payouts. For the year to end-March ‘09, the company may report an increase in the debt-to-equity ratio as it has been unable to sell nearly Rs 700 crore of bonds. However, the situation is likely to improve in the current year. The company has booked a forex loss of Rs 122 crore for the ninemonth period ended December 31, ‘08 due to currency fluctuations. Since the company doesn’t carry any foreign currency debts, this mainly represents the import obligations.

Valuation:
RCF’s stock is now trading at 10.9 times earnings for the last 12 months. We expect the company to post a net profit of Rs 327 crore in FY10, which translates to a forward P/E of 7.5 at the current market price. Other major urea manufacturers such as National Fertilisers and Chambal Fertilisers are trading at P/E of 13.2 and 11.1 respectively. Risk Factors:The company may have to write off mark-to-market loss on the bonds, which it is unable to sell due to their illiquid nature.

Gujarat Gas: Constrained by regulations

Gujarat Gas, the Gujarat based natural gas transporter has outperformed stock markets by a wide margin and is currently trading just 10% below its 52- week high even in the current difficult times. This is despite stagnation in its FY08 financial performance and a fall in the natural gas volumes it sold. The prevalent regulatory scenario is constricting the company in laying pipelines or sourcing more natural gas - the two most important factors needed for its future growth. The natural gas volumes for the company, which grew at a cumulative annual growth rate of 19.8% between ‘04 and ‘07, dropped by 8.9% in ‘08 to 1,089 million metric standard cubic metres (mmscm). This was due to the government’s decision to vest the marketing rights of the natural gas produced by Panna-Mukta-Tapti (PMT) fields with Gail effective 1 April ‘08. With its parent British Gas holding a 30% stake in PMT, it continues to be the largest source of natural gas for Gujarat Gas, accounting for over three-fourths of the gas it sold in ‘08. At present, the company is unable to source natural gas from domestic sources due to the shortage of gas and regulatory restrictions on the end use wherever it is available. For example, new gas from RIL’s KG basin is earmarked firstly for the fertiliser industry and secondly, for power industry and is unavailable for even RIL for its captive consumption. As a result, Gujarat Gas has been importing LNG on spot basis - a costly alternative - to cater to its customers, which are predominantly industrial retail units.
The only way of securing a slice in the increasing domestic availability of natural gas is to set up new city gas distribution (CGD) projects, as around 5 mmscmd of natural gas is earmarked for this purpose. However, setting up CGD projects needs permission from Petroleum and Natural Gas Regulatory Board (PNGRB). Gujarat Gas has obtained PNGRB’s permission to continue operating its existing CGD networks in Ankleshwar, Bharuch and Surat and has applied for areas in Kachchh and Bhavnagar.As the things stand, the company is constrained by the availability of natural gas in its existing areas and the geographical expansion will depend on regulatory approvals. Till such time it is able to secure natural gas supplies, the company’s growth prospects appear limited.

SINTEX Industries : Moulding A Plastic Future

Innovative product offering, healthy financials and zest for inorganic growth make Sintex Industries attractive for long-term investors

Beta: 0.94
Institutional Holding* 58.3%
Dividend Yield: 0.9%
P/E: 5.2
M-Cap: Rs 1,574.5 cr
CMP: Rs 115.35
*As of Dec’08

SINTEX Industries (SIL), which is having a healthy business in India, has taken up the acquisition route to expand geographically. The company has already acquired seven companies in two years and is looking out for more. innovative product offering, healthy financials and zest for inorganic growth make the company attractive for long-term investors. Business: Sintex Industries has two main divisions - textiles and plastics. Under the textiles division, the company sells high-end structured fabric to the international and domestic ready-made garment manufacturers. In the plastics division, the company manufactures pre-fabricated building materials, monolithic structures, custommoulded products and composites. These are high-end plastic products that are used in industries such as automobiles, electricals, construction and telecom.

SIL’s pre-fabricated building materials and monolithic construction material are in great demand in low-cost housing projects, rural schools and healthcare shelters. The company and its subsidiaries put together have 35 plants spread across India, the US and Europe.
Nearly 45% of the company’s consolidated turnover comes from building materials such as pre-fabs and monolithics, 40% comes from custom-moulded and plastic composite products, while the remaining 15% is accounted for by textiles. Textiles and construction materials are businesses conducted by Sintex on a standalone basis, while the subsidiaries manufacture moulded products.

Growth Drivers:
The company raised $225 million in early 2008 through FCCBs and Rs 750 crore by way of qualified institutional placement and issue of warrants to promoters to fund its growth plans. However, due to the subsequent turmoil in the financial markets, acquisition plans could not fructify. The company is carrying around Rs 1,600 crore of cash. Out of this, it will spend around Rs 300crore on organic growth in FY2010 and the remaining on acquisitions.

SIL also spent around Rs 300 crore during FY09 on expanding capacities. For the building materials, the company has gone from a single plant two years back to five plants today. It is planning to add further capacities at these plants. When the company launched its building materials business a couple of years back, it bagged orders worth over Rs 1,700 crore. The current capacities are now capable of executing around Rs 800 crore of orders per annum, which will enable the company to book further orders in the second half of FY2010. At present, the unexecuted order book stands at around Rs 1,300 crore.

Financials:
In last five years, SIL’s PAT has risen at a cumulative annual growth rate of 57.3% and net sales grew at 38.8%. Its debtto-equity ratio jumped to 1.3 in FY08 due to the issue of FCCBs. For the last ten years, the company’s operating cash flows have always remained positive. The December 2008 quarter witnessed a fall in operating margins, mainly due to inventory losses. The company reported a 21% growth in profit on the back of 30% higher sales.

Valuations: At the current market price, the scrip is trading at 5.2 times trailing 12-month earnings. We expect the company to report a net profit of Rs 352 crore for FY 2010, which translates to a forward price-toearnings multiple of 4.5 on current equity. If we assume full conversion of outstanding FCCBs (conversion price: Rs 584) and equity warrants with the promoters (conversion price: Rs 452), the P/E would work out to 6.2 on a fully diluted basis.

Concerns:
The inorganic growth strategy of the company has inherent risks with regard to integration. SIL’s latest attempt at acquisition - Greiger Tech in Germany - has filed for bankruptcy and SIL may lose its initial investment of 7 million if it fails to emerge out of bankruptcy. The company’s overseas subsidiaries are facing pressure on sales and margins due to the economic slowdown. Lastly, the promoters’ holding in the company has dropped below 30% and a large chunk of it has been pledged out.

A Boost In Long Run

Although RIL’s KG basin gas is positive for the fertiliser industry, the benefits are long term and indirect

WITH natural gas starting to flow out of Reliance Industries’ (RIL) fields from this month, a new chapter has begun for India’s fertiliser industry. The perennial shortage of natural gas - a major worry for the urea manufacturers - has become a thing of the past. However, the benefits to the industry are rather long-term and indirect. The direct benefits will all accrue to the government, which will see a reduction in its subsidy payout.

Natural gas is a feedstock for manufacturing urea, which accounts for nearly 56% of the country’s total fertiliser consumption. The total demand from urea units connected to the natural gas grid is estimated at 43 million cubic metres per day (mcmd). However, the current supply falls short by around 14 mcmd, resulting in either under-utilisation of the capacity or use of costly naphtha instead. The recent gas supply agreements signed between RIL and fertiliser companies are set to bridge this gap.
Apart from this, there are several urea plants, which are currently running entirely on costly liquid fuels, such as naphtha or fuel oil, and are yet to be converted to natural gas. Once these plants get natural gas connectivity within the next three years, demand for natural gas from this industry alone would shoot up to 76 mcmd.
Over the last few years, dependence of fertiliser companies on government’s subsidy payments had increased due to rising input costs. For example, in the case of Rashtriya Chemicals & Fertilisers (RCF), the subsidy receipts grew at a cumulative annual growth rate (CAGR) of 35.1% in the last five years, whereas sales of urea grew at 14.1%. Thus, any delays in payments or issue of special bonds instead of cash by the government strained the cash flows of urea manufacturers.This meant higher indebtedness and interest costs. RCF’s total debt more than tripled to Rs 1,243 crore in FY08, while the interest cost jumped eight times to Rs 66 crore.
With the additional gas the cost structure of fertiliser companies will ease, helping them bring down their dependence on the government’s subsidy payouts. Similarly, the government may do away with the practice of paying subsidy by way of bonds - the illiquid nature of which hurts fertiliser companies.
The direct benefit to companies’ bottom lines would come in the form of better capacity utilisation. For example, RCF can now recommission its 3.3-lakh-tpa capacity at Trombay. Similarly, production volumes will go up for companies, such as Tata Chemicals and Chambal Fertilisers that have added capacities by way of debottlenecking. In the long run, the additional availability of natural gas is likely to induce fresh investments in the industry .

Cos may land a windfall from FCCB buybacks

WHEN Moser Baer, the world’s second-largest manufacturer of compact discs, bought back foreign currency convertible bonds worth $51 million in the last three months, it had to pay just $12.4 million. Depressed market conditions and a liquidity crisis helped the company make a gain of around $38.6 million, which translates into an extraordinary gain of over Rs 190 crore at the current exchange rates. “We have bought back the FCCBs at a discount of around 75%,” said Yogesh Mathur, chief financial officer of the company.

Apart from bringing down the liabilities on the company’s books, the transaction may also help it bring down mark-to-market losses provided for against the FCCBs. These gains will help the company post better results in the fourth quarter of the fiscal ended March 31.

Ever since the Reserve Bank of India allowed Indian companies to buy back FCCBs in December 2008, a dozen companies have redeemed such bonds worth $340 million at deep discounts to the conversion price. As in the case of Moser Baer, these companies also will earn twin benefits from FCCB buyback. When they pay off a loan at a discount, they earn a substantial one-time gain. Also, they need not carry the mark-to-market losses for the redeemed FCCBs.

During the first nine months of the last fiscal, firms following Accounting Standard 11 had written off heavy mark-to-market losses towards outstanding FCCBs with the rupee depreciating significantly. For example, Jubilant Organosys wrote off over Rs 410 crore in the first nine months, while JSW Steel booked Rs 808 crore as MTM losses. According to industry sources, a part of such earlier provisions representing the bought back FCCBs could now be reversed.

Although these companies have published their FCCB buyback exploits, some of them, such as M&M and Firstsource Solutions, remain tight-lipped about the discount they received, which could give away the possible extraordinary gains they are likely to book. A press release by Financial Technologies, which redeemed FCCBs of $9.5 million face value, mentions the average discount was a little above 37%. This could earn the firm Rs 17.5 crore of gains the quarter. Ruchi Infrastructure had to pay a little more than 50 cents to a dollar according to their release, which translates into a gain of around Rs 37.5 crore. Wherever the firms had booked accrued interest on these zero coupon bonds, the book value of such bonds will be accordingly higher and hence, the extraordinary gains will also be higher.

So far, Jubilant Organosys has taken the maximum benefit of this opportunity, redeeming $60.9 million of FCCBs in the March quarter and now has $192 million of FCCBs outstanding. The average discount the firm received was 40% of the maturity price of the FCCBs, said R Sankaraiah, finance director, Jubilant. Firstsource Solutions ($49.7 million), JSW Steel ($47.8 million) and Uflex ($45 million) are the other companies.

Most firms went in for ECB for this purpose, wherever their forex earnings fell short. “We have arranged a seven-year ECB line for repaying $49.7 million of FCCBs due in 2012 at a deep discount. So, not only our liability has gone down, we also have a longer duration to repay it,” said Farid Kazani, CFO of Firstsource Solutions. K Chandrasekhar, senior VP, finance, M&M, also acknowledged raising ECB for redeeming $10.5 million of FCCBs.