Petronet’s Revenues received a boost by the 3.3% y-o-y increase in Volumes and 25.0% y-o-y depreciation in the Rupee.
Topline during the quarter increased by 51.5% y-o-y to Rs2,655 crore (Rs1,753cr), which was above our expectation of Rs1,992 crore, largely on account of the higher-than-expected realisations from gas sales.
Other Income increased 11.3% y-o-y to Rs20 crore (Rs18cr) during the quarter, whereas the effective tax rate remained flat at 34.1%.
Thus, superior operating performance coupled with higher other income resulted in PAT increasing by 70.1% y-o-y to Rs204 crore (Rs120cr), which was significantly above our expectation of Rs102cr.
Petronet LNG currently operates the 6.5MMTPA LNG processing facility at Dahej, Gujarat. It expects to expand capacity to 11.5MMTPA by end of 1QFY2010. The company currently procures 5.0MMTPA of gas from Rasgas (Qatar).
Its agreement with Rasgas for another 2.5MMTPA is likely to start in October 2009. The company also has a medium-term contract with BP for around 1.25 - 1.5MMTPA of LNG supply. Thus, supplies are likely to be around 8.5- 9.0MMTPA by end of FY2010 with the balance 2.5-3.0MMTPA to be met through Spot cargoes.
Moreover, to fill the gap of un-tied capacities, the government has proposed Qatar to take 10% stake in Petronet LNG. If this deal is sealed, it could prove to be a big positive for the stock, as hitherto un-tied capacities have been a big overhang over the stock performance.
On the flip side, the major concern now in the stock is tying up of capacity for its Kochi terminal at unviable terms. Petronet’s current negotiations with Mobil Australia for sourcing LNG for the Kochi terminal are proving to be a damp squib.
Initially, discussions were held for 2.5 - 3.75MMTPA to be supplied by Mobil. But, Mobil has informed that only 0.48MMTPA (firm) and 0.375MMTPA (on seller’s option) was left for sale to PLL.
With this announcement, the three bulk off-takers from PLL, viz. GAIL, IOCL and BPCL have expressed their disappointment at the small quantity of natural gas being considered by Mobil Australia to be supplied to the Kochi terminal.
The Gorgon project is being promoted by Chevron (50% stake), Exxon Mobil (25% stake) and Shell (25% stake) with a total likely capacity of 15MMTPA.
Exxon Mobil can supply a maximum of 3.75MMPTA of LNG from its 25% share in the project when it is commissioned in 2014-2015. But clearly, Exxon Mobil seems to have committed the rest of the quantity elsewhere, leaving PLL with only 0.48MMTPA on a firm basis.
Moreover, the impending shift in the natural gas supplies in the country could also adversely impact dynamics of the Kochi terminal.
We have revised our FY2010 estimates to factor in higher-than-anticipated Profitability from Spot cargoes, which is largely on account of lower Spot LNG price. As a result, our FY2010 EPS stands increased to Rs7 per share from Rs6.5 per share earlier.
Petronet LNG was our top pick in the Sector and has rallied almost 80% from its lows, thus adequately factoring the upside potential from the new terminal.
Even after factoring in higher Earnings on account of Spot LNG volumes, our target price stands revised to Rs56 per share (Rs52 earlier), providing a meager 7.7% upside from current levels.
Further, given the higher component of profitability coming from the Spot business (volatile Profitability), the risk-reward ratio is unfavourable. The stock is currently trading at 7.4x FY2010E Earnings. We downgrade the stock from Buy to NEUTRAL.