Petronet LNG Ltd’s September quarter earnings beat estimates by a wide margin. The company reported a net profit of 249 crore, similar to what it reported in the June quarter (when numbers got a boost by tax reversal) but 5% lower than a year ago. Pre-tax earnings increased as much as 43% sequentially. The September quarter’s profit was 20% ahead of the Bloomberg consensus, and 25% ahead of the in-house estimate, said a Nomura Research note.

Petronet LNG operated its Dahej terminal at about 120% of its nameplate capacity, which would have helped its performance. Even though the company’s offtake under the long term quantities have reduced year-on-year, the total volume regasified at the Dahej Terminal during the quarter was 154 trillion British thermal units (tBtu), which is the highest ever quarterly volume processed, according to the company.

Sure, long-term and short-term re-gasification volumes have declined sequentially, but volumes from services (tolling) increased sharply during the quarter. Higher-than-expected volumes helped Petronet LNG report an operating profit margin of 6.2%, highest in at least past eight quarters.

But investors aren’t too impressed. Shares of Petronet LNG have barely budged since the numbers were announced on Monday.

What could their concern be? Significant price difference between high priced long-term volumes and spot volumes has forced the company to reduce its long-term volumes. For calendar year 2015, R-LNG (regasified liquefied natural gas) offtake under long-term sales contracts with off-takers was around 68% of planned volumes till the nine months ended September. That resulted in lower LNG off-take under long-term supply contract with RasGas, Qatar. The problem really is the take or pay obligations, if any, that can arise as a result of this development. Clarity on this is expected after the close of calendar year.

Analysts reckon that unless the issue is resolved, the stock is likely to be under pressure from a near-term perspective. The Petronet LNG stock trades at 14 times its estimated earnings for the next fiscal year. But it is virtually at the same level, as a year ago. Current valuations seem more focused on the short-term take-or-pay issue and they ignore the 50% capacity addition at Dahej, points out IIFL Institutional Equities.

“Our earnings forecast of 28% pa growth over FY16-18 assumes timely completion of Dahej expansion and PLNG not incurring any take-or-pay liability on the RasGas LNG contract," said IIFL analysts in a post-results note. While that augurs well, from a near-term perspective, a favourable resolution on the RasGas matter is critical. Progress on Petronet LNG’s Kochi terminal is another important measure, from the medium term viewpoint, that investors must keep a tab on.

The writer does not own shares in the above-mentioned companies.

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