The drop in profits of Petronet LNG in the quarter to September has already been discounted by analysts considering that the company had capitalised its underutilised Kochi terminal during the quarter. But the performance in the last quarter indicates that some of its operating challenges will not be easy to surmount in the near term and the stock is likely to underperform over the next three to six months.
Petronet LNG, which imports and sells liquefied natural gas (LNG) to local firms and has two terminals, encountered multiple headwinds during the quarter. A bout of rupee volatility resulted in a lower demand for imported natural gas leading to a 9% y-o-y drop in volumes to 123 trillion British thermal units (tBtu). Its long-term volumes were up 9% to 98 tBtu, but tolling and spot volumes were down 31% and 55% at 12 and 12.5tBtu, respectively. This translated into a 30% drop in operating profit at . 363.9 crore.
The company also commissioned its new 5-million tonne import terminal at Kochi during the quarter, which boosted its depreciation charge by 27.7% and interest burden by 22% from the year-ago levels. This led to a 40% drop in profit before tax and close to 42% at the net profit level, thanks to a rise in the effective tax rate.
The capacity utilisation at the new Kochi import terminal is going to be a big worry for the company due to the lack of adequate pipeline connectivity. The expected commissioning of the Kochi-Mangalore pipeline has been pushed to October 2014, compared to May 2014 earlier. There is no clarity on the Mangalore-Bangalore pipeline too. Until these pipelines become functional, the Kochi terminal’s capacity utilisation will remain below 10%. This will depress corporate earnings due to higher depreciation and interest costs. During the July-September ’13 period, the Kochi terminal incurred a loss of . 32 crore before tax, even though the terminal has been recognised as an asset in the books of accounts only from September 10, 2013. From the quarter to December this year, as interest and depreciation on this asset will be booked for the full quarter, it will put greater pressure on the company’s profitability.
Petronet LNG plans to add one more jetty at its Dahej terminal by May ’14, which would enable it to import 1.25 million tonne more annually. Similarly, its project to expand the Dahej terminal’s capacity by adding two more storage tanks will take 36 months to operationalise.
Most brokerage houses, including Kotak Securities, Motilal Oswal, Karvy Broking and Religare, remain bullish on the company’s future prospects with target prices ranging from . 142 to . 165 due to low valuations and on expectations that the domestic shortage of natural gas will favour Petronet LNG. Another brokerage Centrum Capital took a contrarian view recommending a ‘Sell’ on the stock with a target price of . 110 as the company “faces multiple headwinds which would lead to earnings pressure.” Investors should be cautious since the stock lacks any near-term positive trigger, while facing the challenge of pressure on profits.
Petronet LNG, which imports and sells liquefied natural gas (LNG) to local firms and has two terminals, encountered multiple headwinds during the quarter. A bout of rupee volatility resulted in a lower demand for imported natural gas leading to a 9% y-o-y drop in volumes to 123 trillion British thermal units (tBtu). Its long-term volumes were up 9% to 98 tBtu, but tolling and spot volumes were down 31% and 55% at 12 and 12.5tBtu, respectively. This translated into a 30% drop in operating profit at . 363.9 crore.
The company also commissioned its new 5-million tonne import terminal at Kochi during the quarter, which boosted its depreciation charge by 27.7% and interest burden by 22% from the year-ago levels. This led to a 40% drop in profit before tax and close to 42% at the net profit level, thanks to a rise in the effective tax rate.
The capacity utilisation at the new Kochi import terminal is going to be a big worry for the company due to the lack of adequate pipeline connectivity. The expected commissioning of the Kochi-Mangalore pipeline has been pushed to October 2014, compared to May 2014 earlier. There is no clarity on the Mangalore-Bangalore pipeline too. Until these pipelines become functional, the Kochi terminal’s capacity utilisation will remain below 10%. This will depress corporate earnings due to higher depreciation and interest costs. During the July-September ’13 period, the Kochi terminal incurred a loss of . 32 crore before tax, even though the terminal has been recognised as an asset in the books of accounts only from September 10, 2013. From the quarter to December this year, as interest and depreciation on this asset will be booked for the full quarter, it will put greater pressure on the company’s profitability.
Petronet LNG plans to add one more jetty at its Dahej terminal by May ’14, which would enable it to import 1.25 million tonne more annually. Similarly, its project to expand the Dahej terminal’s capacity by adding two more storage tanks will take 36 months to operationalise.
Most brokerage houses, including Kotak Securities, Motilal Oswal, Karvy Broking and Religare, remain bullish on the company’s future prospects with target prices ranging from . 142 to . 165 due to low valuations and on expectations that the domestic shortage of natural gas will favour Petronet LNG. Another brokerage Centrum Capital took a contrarian view recommending a ‘Sell’ on the stock with a target price of . 110 as the company “faces multiple headwinds which would lead to earnings pressure.” Investors should be cautious since the stock lacks any near-term positive trigger, while facing the challenge of pressure on profits.
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