Petronet LNG Trading margins hurt profitability PhillipCapital (India) Pvt. Ltd. OIL & GAS: Quarterly Update 4 August 2014 EBITDA lower than estimate led by trading margin decline, depreciation helps the PAT: Petronet’s EBITDA at Rs3.58bn was 15.2% lower than our estimate, on NEUTRAL account of lower than expected marketing margins on the spot volumes. Despite PLNG IN | CMP RS 180 higher than expected volumes processed (10.9% higher than estimate at 125.2 TARGET RS 170 (‐6%) TBTU’s); gross profitability (Rs4.61bn) was lower than our estimates due to sudden decline in LNG prices leading to losses on the trading volumes. This Company Data coupled with rise in share of low margin tolling volumes (24.9TBTU’s against O/S SHARES (MN) : 750 MARKET CAP (RSBN) : 140 estimate of 11.2TBTU’s and 4QFY14 volumes of 4.5 TBTU’s) led to lower than MARKET CAP (USDBN) : 2.3 estimated operating profits. Depreciation during the quarter was lower than the 52 ‐ WK HI/LO (RS) : 190 / 103 estimates due to change in depreciation policy (depreciation now based on LIQUIDITY 3M (USDMN) : 6.0 FACE VALUE (RS) : 10 effective life of 25 years against the earlier mandated life of 18 years). PAT at Rs1.57bn was lower than our estimate of Rs1.73bn. Share Holding Pattern, % PROMOTERS : 50.0 FII / NRI : 32.6 Key call highlights: 1/Dahej’s 2nd Jetty has been commissioned on 18th April FI / MF : 3.3 2014; thereby boosting the Jetty handling capacity to 17.5MMTPA, however NON PROMOTER CORP. HOLDINGS : 1.7 PUBLIC & OTHERS : 12.5 despite the decline in LNG prices management guided that re‐gasification volumes are unlikely to rise significantly from current levels. 2/Kochi terminal Price Performance, % 1mth 3mth 1yr volumes continue to remain subdued with operating losses at Rs~160mn. ABS 6.4 28.2 59.7 3/Leasing the storage at Kochi terminal is likely to be done in 2QFY15. 4/Petronet REL TO BSE 6.6 14.6 27.8 has got the approval from the state government for the Gangavaram terminal; Price Vs. Sensex (Rebased values) management is likely to now proceed with the sourcing of the gas and customer tie‐up. 5/Management expects financial closure of the Gangavaram terminal over 270 240 the next 1 year. 6/Change in depreciation policy led to Rs250‐300mn fall in 210 depreciation charge. 180 150 Valuation & Outlook: PLNG’s stock has appreciated ~75% from its lows on 120 account of improved visibility on utilization of Dahej terminal (back‐to‐back 90 contracts for 14.5MMTPA volumes and likely ONGC contract for replacement of 60 C2‐C3 of ~0.9MMTPA) and correction in spot LNG prices to ~US$10.5/mmbtu. 30 Apr/10 Apr/11 Apr/12 Apr/13 Apr/14 While some hold Kochi terminal’s utilization rate could improve following any Petronet LNG BSE Sensex early resolution of the entangled pipeline, that would evacuate LNG from Kochi, Source: Phillip Capital India Research we highlight with GAIL having already taken a write off, any amicable solution could take longer. Besides, our estimates fully captures medium term upsides Other Key Ratios Rs mn FY14E FY15E FY16E with 2/3/4.1 MMTPA in FY17‐19E, this coupled with expensive valuations turns Net Sales 377,476 439,670 448,623 risk‐reward unfavorable. We believe the current valuations are demanding and Ebidta 14,984 16,821 20,019 factors in all near term positives leaving little room for upside from current levels Net Profit 7,119 7,438 9,776 (EV/CE ~1.5x FY16). On FY16E, there seems to be a limited upside at ~15x P/E, EPS, Rs 9.5 9.9 13.0 1.2x EV/GCI and 1.5x EV/CE. We believe, on account of rich valuations +2SD (std PER, X 19.0 18.1 13.8 EV/EBIDTA, x 10.3 9.4 7.8 deviation) 1‐year forward PE and more than +1SD in case of EV/Core EBITDA EV/Net Sales, x 2.7 2.4 2.2 leaves limited scope for further upsides in the near term. We recently ROE, % 14.3 13.5 15.6 downgraded our recommendation to ‘NEUTRAL’ with a revised price target of Debt/Equity, % 64.1 65.9 63.2 Rs170/share. We reduce marketing margins assumption for FY15 due to weak Source: PhillipCapital India Research Est. margins reported in Q1FY15 and also account for change in depreciation policy as Gauri Anand (+ 9122 66679943) a result our EPS is enhanced by about 5%. (For detailed note on Petronet ‐ [email protected] th Running out of gas dated 28 July Click here). Deepak Pareek (+ 9122 6667 9950) [email protected] Please refer to Disclosures and Disclaimers at the end of the Research Report. 4 August 2014 / INDIA EQUITY RESEARCH / PETRONET LNG COMPANY UPDATE Q1FY15 Results result Y/E Mar Q1FY15 Q1FY14 YoY gr. (%) Q4FY14 FY14 FY13 YoY gr. (%) Net Sales 101,608 84,442 20.3 104,278 377,476 314,668 20.0 Expenditure Raw material 96,995 79,593 21.9 99,344 358,424 292,098 22.7 % of net sales 95.5 94.3 95.3 95.0 92.8 Personnel cost 122 86 42.1 195 466 370 26.0 % of net sales 0.1 0.1 0.2 0.1 0.1 Other operating expenses 913 785 16.3 871 3,601 2,819 27.8 % of net sales 0.9 0.9 0.8 1.0 0.9 EBITDA 3,578 3,978 (10.1) 3,868 14,984 19,381 (22.7) Margin (%) 3.5 4.7 3.7 4.0 6.2 Depreciation 770 467 64.9 1,000 3,081 1,866 65.1 EBIT 2,808 3,511 (20.0) 2,868 11,903 17,515 (32.0) Interest 784 240 226.5 786 2,196 1,184 85.4 Other Income 353 152 131.8 308 838 865 (3.2) PBT 2,377 3,423 (30.6) 2,389 10,545 17,197 (38.7) Total taxes 810 1,170 (30.8) 696 3,426 5,710 (40.0) ETR (%) 34.1 34.2 29.1 32.5 33.2 Rep. PAT 1,567 2,253 (30.5) 1,693 7,119 11,487 (38.0) Exceptional Items ‐ ‐ ‐ ‐ ‐ Adj. PAT 1,567 2,253 (30.5) 1,693 7,119 11,487 (38.0) Margin (%) 1.5 2.7 1.6 1.9 3.7 Operational metrics Y/E Mar Q1FY15 Q1FY14 YoY gr. (%) Q4FY14 FY14 FY13 YoY gr. (%) Contracted Sales (TBTUs) 96.4 92.3 4.5 92.0 374 377 (0.8) Spot Volumes (TBTUs) 17.4 19.0 (8.2) 20.8 66 103 (36.1) Tolling Volumes (TBTUs) 24.9 18.3 36.1 4.5 53 45 16.8 EBITDA/TBTU 25.8 30.7 (16.0) 33.0 30.4 36.9 (17.6) Source: Company, PhillipCapital India Research Margin Bridge: Trading margins slips Marketing margins on spot volumes Regasification on Fixed , spot and Tolling volumes 100% 80% 60% 40% 20% 0% ‐20% Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Source: PhillipCapital India Research Estimates – 2 of 9 – 4 August 2014 / INDIA EQUITY RESEARCH / PETRONET LNG COMPANY UPDATE Blended margin trend 40.9 45 40.4 39.8 39.8 38.6 38.4 36.7 40 32.7 32.1 34.3 32.3 31.8 30.3 35 30.1 29.1 28.9 26.3 26.0 30 25.2 22.1 25 20.4 TBTU) / 20 (Rs 15 10 5 0 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Source: PhillipCapital India Research Estimates R‐LNG Volumes Contracted LNG Sales in TBTUs 120 Spot cargo & Tolling volumes sales in TBTUs (Incl. RGPPL Gas) 100 80 TBTUs 60 40 20 0 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Source: PhillipCapital India Research Estimates – 3 of 9 – 4 August 2014 / INDIA EQUITY RESEARCH / PETRONET LNG COMPANY UPDATE Capacity Utilization higher due to improved Dahej Utilization 120% 110% 100% 90% 80% 70% 60% Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Source: PhillipCapital India Research Estimates Operating revenue – Growth trend (YoY) Total operating revenues Growth (RHS) 120,000 100 100,000 80 80,000 60 m) 60,000 40 (%) (Rs 40,000 20 20,000 0 ‐ ‐20 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Source: PhillipCapital India Research Estimates Operating performance trend 6,000 Operating Profit Margin (RHS) 12 5,000 10 4,000 8 m) 3,000 6 (%) (Rs 2,000 4 1,000 2 ‐ 0 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Source: PhillipCapital India Research Estimates – 4 of 9 – 4 August 2014 / INDIA EQUITY RESEARCH / PETRONET LNG COMPANY UPDATE PAT weighed down by higher interest and depreciation on Kochi commissioning PAT Growth (RHS) 3,500 150 3,000 100 2,500 50 m) 2,000 (Rs (%) 1,500 0 1,000 ‐50 500 ‐ ‐100 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Source: PhillipCapital India Research Estimates – 5 of 9 – 4 August 2014 / INDIA EQUITY RESEARCH / PETRONET LNG COMPANY UPDATE Financials Income Statement Cash Flow Y/E Mar, Rs mn FY13 FY14 FY15E FY16E Y/E Mar, Rs mn FY13 FY14 FY15E FY16E Net sales 314,674 377,476 439,670 448,623 Pre‐tax profit 17,203 10,545 11,138 14,638 Growth, % 39 20 16 2 Depreciation 1,866 3,081 3,397 3,558 Total income 314,674 377,476 439,670 448,623 Chg in working capital 5,194 -7,559 2,565 -107 Raw material expenses ‐293,050 ‐358,424 ‐418,134 ‐423,312 Total tax paid -5,430 -1,806 -3,404 -4,474 Employee expenses ‐370 ‐466 ‐480 ‐528 Cash flow from operating activities 18,833 4,261 13,696 13,616 Other Operating expenses ‐2,819 ‐3,601 ‐4,235 ‐4,764 Capital expenditure -10,635 -7,647 -15,700 -8,900 EBITDA (Core) 18,436 14,984 16,821 20,019 Cash flow from investing activities -10,635 -7,647 -15,700 -8,900 Growth, % 0.8 (18.7) 12.3 19.0 Free cash flow 8,197 -3,386 -2,004 4,716 Margin, % 5.9 4.0 3.8 4.5 Equity raised/(repaid) 9,299 5,364 5,433 7,470 Depreciation ‐1,866 ‐3,081 ‐3,397 ‐3,558 Debt raised/(repaid) -3,158 4,783 4,500 3,188 EBIT 16,570 11,903 13,424 16,461 Dividend (incl.