High valuations, margin woes spoil the day for Petronet LNG

Despite higher volumes, posts weaker results; many analysts bearish or neutral on scrip, expecting continued pressure

Petronet LNG posted lower than expected results for the June quarter, due to a sharp correction in marketing margin and weak operational performance of its Kochi terminal.

Sales were Rs 10,161 crore, up 20 per cent over a year. Net profit was Rs 157 crore, down 30 per cent. Both were lower than the consensus Bloomberg estimates of Rs 10,302 crore and Rs 174 crore, respectively. A 76.5 per cent fall in marketing margin to $0.2 per million British thermal units (mBtu) on spot liquefied natural gas (LNG) cargoes was the key earnings dampener. It offset the gains from high re-gasification volume growth, of 36.6 per cent over a year during the June quarter.

However, start of the GSPC contract and higher offtake of LNG due to lower prices supported overall volume growth, of seven per cent. Petronet is in the business of importing, storing and re-gasifying of LNG.

As a result, Ebitda (earnings before interest, taxes, depreciation and amortisation) fell 10 per cent to Rs 358 crore and margins dipped 120 basis points (bps) to 3.5 per cent compared to the year-ago quarter. Although higher other income (up 129.7 per cent to Rs 35 crore) helped, interest costs and depreciation surged largely due to the Kochi terminal, commissioned in last year’s September quarter. These led to the fall in net profit.

The trend is likely to remain subdued for Petronet LNG. Coupled with high valuations, it renders the stock unattractive.

The weak performance of its Kochi terminal is a key concern. While the utilisation rate at about 109 per cent remained strong at its Dahej terminal, the Kochi terminal utilisation was a mere one per cent. Analysts expect volumes at Kochi to rise only by FY16 and the terminal to break-even by FY17. This is contingent on completion of GAIL’s Kochi-Mangalore and Kochi-Bangalore pipelines.

“Outlook for the Kochi terminal continues to remain muted. While volumes are likely to witness some uptick, visibility on GAIL’s Kochi-Mangalore-Bangalore pipeline remains uncertain. We expect six to eight per cent utilisation over the next two to three years,” says Amit Rustagi, oil and gas analyst, Antique Stock Broking.

Low utilisation levels led the Kochi terminal to report a loss of Rs 15 crore during the quarter. The company, however, is trying to lease out two million tonnes per annum (mtpa) LNG storage at Kochi. While it will add to revenues, the gains are unlikely to be substantial, believe analysts. “Petronet LNG is experimenting with the Kochi terminal as a short-term storage facility for global traders, which we believe is unlikely to materially benefit utilisations,” say analysts at IDBI Capital.

Expansion of Dahej terminal capacity to 15 mtpa from the 10 mtpa prevailing is also likely to be finished by December 2016, suggesting that volume gains in FY16 might not be far from the FY15 estimated levels.

In this backdrop, analysts have trimmed their full-year earnings estimates for the company. Even as they expect Petronet’s volumes to grow 13 per cent to 11 million tonnes this financial year, the marketing margins are estimated to be lower by 70 per cent at $0.3 per mBtu, as LNG availability in the country is expected to increase.

A large number of analysts remain bearish or neutral on the scrip, with its high valuations and continued pressure on marketing margins.

Of the 29 analysts polled by Bloomberg this month, 14 have a ‘Sell', 10 a ‘Hold’ and five a ‘Buy’ rating on the stock. Their average target price is Rs 163, about five per cent lower than now. The stock, which gained 52 per cent since the start of 2014, has fallen 7.4 per cent over the two sessions after the results. Even now, it trades at 17.5 times the FY15 estimated earnings, much ahead of its historical average one-year forward price to earnings ratio of about 10.7 times.

“We downgrade our rating to ‘Sell', as we believe the recent rally in the stock adequately factors in the volume upsides from the Dahej terminal,” says Prayesh Jain, analyst at IIFL.