Domestic Gas Shortage, Higher Demand to Fuel Petronet Growth

Current earnings signal better utilisation of assets can ring in profits

India’s largest natural gas importer Petronet LNG reported a strong set of numbers for the March 2011 quarter, which were ahead of most analyst expectations. The stock’s fall on Wednesday had more to do with the overall market weakness. Domestic gas shortages maintain a strong positive outlook for the company, which means long-term investors should continue to hold.
Petronet’s volumes for the March 2011 quarter jumped 37% to 125 trillion British thermal units (TBTUs). In addition, the 5% increase in the regassification charges implemented every January helped the company boost its quarterly revenues 67% to . 3,986 crore. The positive effect of a minor increase in operating profit margin was offset by a fall in other income as the PBDIT stood 63% up year-on-year to . 382.7 crore. It was mainly the fall in interest and depreciation costs that boosted the company’s net profits. Since the company operates in capital-intensive industry, the interest and depreciation forms a large chunk of its expenses. During the March 2011 quarter, the interest costs came down 16% with a slight decrease in depreciation charge. The resultant pre-tax profit was more than twice the March 2010 quarter figure. With effective tax rate staying near 30% as last year, the jump in net profit stood 112% at . 206.3 crore.
The earnings give an idea as to how company’s assets can become more profitable on higher utilisation. The company operated its expanded 10 million tonne per annum (MTPA) capacity at 100% utilisation level during the March quarter. It already has 7.5 MTPA long-term supplies tied up with Qatar’s RasGas and is able to process a number of spot cargos.
One good thing that the company revealed was the tie-up for further 1.5 MTPA of LNG for FY12 and FY13, for which it has also entered into back-to-back sales agreements with its offtakers. This gives visibility to next couple of years of its volumes, which will be at least 90% of its capacity, plus whatever spot cargos it can import. Typically, the company’s plant can operate at 120-130% of its nominal capacity, which gives it the necessary flexibility in importing spot cargos. By December 2012, its 5-MTPA Kochi terminal is set to complete, which will cater to the hitherto untapped market in the South and add another growth driver to the company’s earnings.