Petronet LNG Ltd reported lower-than-expected set of numbers for the March quarter on the back of lower regasification margins, absence of spot volumes and negligible tolling volumes. Profit, which registered a decline of 52.3% year-on-year (y-o-y) to Rs97 crore, came in lower than our expectation of Rs135 crore.
During the fourth quarter of FY10, Petronet LNG reported 10.1% y-o-y decline in revenue to Rs2,385 crore, which was much below our expectation on account of the absence of costly spot volumes. Volumes during the quarter stood at 91.8 trillion British thermal units (tBtu) and were much below our expectation of 123 tBtus. Volumes were higher by 11.3% y-o-y on account of commissioning of additional 2.5 million tonnes per annum (mtpa) of gas supplies from Qatar, but were lower 3.7% sequentially on account of the absence of spot volumes and negligible tolling volumes due to lack of demand for imported gas on account of lack of gas transmission capacity along with ramp up of domestic gas production from Krishna-Godavari D6.
Graphic: Naveen Kumar Saini/Mint
Contractual volumes during the quarter were higher on a sequential basis at 90.8 tBtus, while spot volumes were nil against 19.3 tBtu registered in the third quarter of FY10. Tolling volumes were merely 0.97 tBtu against substantial 10.9 tBtu registered in the third quarter of FY10. On the revenue front, the company reported 10.1% y-o-y decline in revenue to Rs2,385 crore, which was much below our expectation of Rs3,414 crore. Realization during the quarter registered a substantial decline of 18.6% y-o-y on account of rupee appreciation coupled with the absence of spot liquefied natural gas (LNG) imports.
Net regasification margins during the quarter rose by 5.3% sequentially to Rs26.30 per mmBtu, but was lower than our expectation on account of adjustment of Rs24 crore of forex gain in other income vis-a-vis raw material cost along with increased cost of internal consumption of gas.
Though the company’s fourth quarter performance came in below our expectations, we believe that it will deliver better set of numbers going ahead on account of increased spot LNG imports once GAIL (India) Ltd’s pipeline capacity expansion gets completed in the latter half of FY11. On the tariff front, we do not see significant risks emerging in the near future due to the absence of regulatory interference.
Nonetheless, we do not expect the trend of annual escalation to continue. In fact, we have assumed a freeze on regasification margins from 2011 onwards on account of repricing of LNG following the monthly alignment with JCC Index prices. Thus, there could be upsides to our estimates if the annual hike in the regasification margins continues beyond the current calendar year.
We believe that LNG is likely to be a key source of gas supplies in the medium term on account of strong gas demand in the country. Hence, Petronet LNG is a proxy play on the increasing gap between natural gas supplies and demand in the country. However, there are some concerns over the long-term viability of LNG on account of the expected steep increase in the domestic gas supplies going ahead.
But, given that some of the domestic sources of gas could witness delays due to execution slippages, the concerns could subside. Moreover, we expect the domestic gas demand estimates to be revised upwards on account of increasing pipeline connectivity to various regions. The government is also making efforts to maintain long-term viability of LNG in the overall gas mix of the country.
Petronet has enhanced capacity of its Dahej terminal to 11.5 mtpa.
We maintain an accumulate on the stock, with a 12-month discounted cash flow-based target price of Rs87.