Petronet LNG: A disproportionate rise in operating cost squeezes margin by 50 bps to 8.4%

Petronet LNG posted yet another quarter of strong performance with its profits for the September ’11 quarter doubling from the year-ago period. The strong domestic demand for natural gas enabled it to operate its LNG importing plant at 106% capacity. The company appears well placed to maintain its performance in coming quarters.
Petronet LNG’s net sales for the quarter were 76% up against the September ’10 quarter as volumes jumped 35.4% to 135 trillion British thermal units (TBTUs). Other factors to boost revenues were a strong jump in LNG prices that are passed on to customers and a marginal growth in re-gassification charges.
A disproportionate jump in operating costs dented its operating profit margins, which dropped 50 basis points to 8.4%. Depreciation and interest costs, which are the largest cost items for the company, fell 1% and 7%, respectively, thereby boosting the pre-tax profit by 94%. A marginal dip in the effective tax rate took net profit higher by 99% to . 260.3 crore.
Rising LNG prices in the spot market had raised concerns about demand destruction, if it became cheaper to use fuel oil. The current spot LNG prices translate into $15-17 per million BTUs (MMBTU). Nearly 15% of the company’s volumes come from spot cargos.
However, the management explained in its post-results conference call that its capacity is fully booked for the next three-four months with customers ready to pay the increased prices. The volumes from the long-term contract with RasGas had averaged 90 TBTUs in the first half of FY12, which should move up to 94 in the second half.
The company is setting up another LNG terminal at Kochi with 5 MTPA capacity at a cost of . 4,200 crore to be commissioned by December 2012. It is also setting up a second jetty at Dahej at a cost of . 900 crore, which will enable it to improve utilisation of its existing capacity by another 20-25%.
The scrip is trading at a price-toearnings multiple (P/E) of 13.5 considering its profits for the last 12 months. However, based on annualised profits for the first half of FY12, the P/E works out to 11.7.