Financial Analysis

Petronet LNG Ltd

Vivek Antil (03) PGDM-FS

Subject

Financial Management

Page

India Overview of the Oil Drilling and Exploration Sector

Oil Drilling and Exploration is a small sector with less than 20 companies listed. ONGC is the mammoth in the sector. ONGC, GAIL, Petronet LNG and Oil India have sales of more than 10,000 Crores per year. On the Market Cap, ONGC commands a whopping 200,000 Crores plus value. Cairn India, GAIL, Oil India and Petronet LNG all command more than 10,000 Crores market cap each.

Top 10 firms on basis of annual revenue and Market Cap are as follows:Company Name ONGC GAIL Petronet LNG Oil India Guj Gas Indraprastha Gas Shiv Vani Oil Aban Offshore Jindal Drilling Guj State Petro Annual Revenue (Crores INR) 66164 32459 13197 11623 1846 1759 1222 1191 1053 1039 Company Name ONGC Cairn India GAIL Oil India Petronet LNG Indraprastha Gas Guj State Petro Guj Gas Aban Offshore Hind Oil Explore Market Cap (Crores INR) 217181 56859 47352 28939 11719 5469 4980 4758 1577 1509

Gross Profit Margins 2010 2009 2008 2007 2006 Average last 5 yrs Selan Explore 78.0 77.7 80.3 72.4 73.9 76 Hind Oil Explor 43.1 54.5 77.0 92.4 88.1 71 Guj State Petro 77.8 70.2 52.8 48.9 72.6 64 Aban Offshore 59.0 58.9 49.5 46.3 50.7 53 ONGC 50.9 53.9 43.6 43.0 52.5 49 Deep Industries 46.0 45.4 43.2 45.7 37.2 44 Shiv Vani Oil 42.0 39.5 37.6 35.0 31.2 37 Alphageo 20.8 18.9 31.5 45.4 45.0 32 Oil India 31.2 32.6 32 Indraprastha Gas 23.2 23 Guj Gas 20.0 17.0 16.1 23.0 20.2 19 GAIL 15.0 16.5 15.0 18.8 20.7 17 Asian Oilfield 6.6 -5.2 19.4 28.9 29.6 16 Dolphin Offshor 9.4 16.0 16.2 12.4 14.5 14 Jindal Drilling 14.0 11.1 7.8 6.9 13.6 11 Petronet LNG 7.8 6.4 9.9 11.7 9.9 9 Sah Petroleums 4.3 -3.6 8.5 9.6 6.9 5 Duke Offshore 51.3 -328.8 -139 Cairn India -4957.1 -5219.7 -3829.3 -6251.0 -5064 On the EPS front, there are 3 companies which have consistently grown EPS, these are Guj. State Petro, Oil India and GAIL. Seven companies in the sector have grown EPS more than 100% in four years, which is excellent for the sector as a whole. EPS Hind Oil Explor Guj State Petro Jindal Drilling Deep Industries Guj Gas Selan Explore Aban Offshore Petronet LNG IndraprasthaGas Oil India GAIL ONGC Sah Petroleums Dolphin Offshor Shiv Vani Oil Cairn India 2010 6.2 9.0 44.0 5.1 20.1 18.7 47.4 8.3 18.6 120.1 28.1 22.1 3.6 13.4 8.8 -1.1 2009 3.2 7.4 36.7 6.8 13.6 18.7 58.1 5.4 15.4 108.6 24.8 19.6 -1.4 29.6 19.9 -0.4 2008 4.1 2.2 16.3 3.8 12.3 32.6 61.5 6.9 12.3 101.0 22.1 18.9 0.0 29.9 21.6 0.3 2007 1.9 1.8 8.0 3.6 12.3 9.0 35.2 6.3 12.5 83.6 20.5 19.5 5.8 12.1 12.3 -0.4 2006 Growth % last 4 years 0.3 1822 1.7 445 8.7 403 1.2 328 6.9 192 7.3 155 23.3 103 4.2 98 9.9 88 76.6 57 18.8 49 18.3 21 3.2 14 11.8 13 8.0 9 -0.2

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Book Value growth is more consistent for the sector, with more than half the companies growing BV more than 100% in 4 years. Several companies have shown explosive, yet consistent growth in BV. This is definitely a great sector to find high growth companies. BV / S Jindal Drilling Aban Offshore Interlink Petro Dolphin Offshor Selan Explore Shiv Vani Oil Asian Oilfield IndraprasthaGas Petronet LNG Oil India Guj State Petro Guj Gas Hind Oil Explor Alphageo GAIL Deep Industries ONGC Sah Petroleums Cairn India Duke Offshore 2010 196.5 466.7 15.2 134.5 99.8 205.9 60.2 71.7 35.7 655.7 35.6 63.7 90.0 98.7 151.8 53.5 114.0 28.0 167.0 6.1 2009 153.1 424.6 15.4 120.4 93.0 199.4 64.6 59.0 29.8 572.5 27.8 57.5 84.4 2008 117.9 243.2 9.1 82.4 68.2 160.6 67.1 48.8 26.5 436.1 21.6 53.3 81.1 2007 103.0 187.0 1.7 55.1 38.0 140.2 58.6 41.2 21.6 370.8 20.3 42.8 77.3 2006 34.2 96.5 3.4 37.7 30.8 65.3 21.4 33.4 17.0 320.1 17.8 32.2 49.8 57.2 89.8 32.6 72.4 21.6 165.8 -0.2 73 69 64 57 30 1
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Growth % last 4 years 474 384 343 256 224 215 181 115 110 105 100 98 81

123.9 106.0 92.8 132.4 48.1 102.0 24.4 168.1 5.0 116.4 38.9 92.0 25.8 168.5 4.2 102.5 35.1 82.5 26.1 164.6 -0.5

Natural Gas: Current and Future Developments

Background Natural Gas is a gaseous fossil fuel consisting primarily of methane and is found in oil fields, natural gas fields or in coal beds. Apart from methane (CH4), the shortest and lightest hydrocarbon molecule, it may also contain heavier gaseous hydrocarbons such as ethane (C2H6), propane (C3H8) and butane (C4H10), as well as other sulphur containing gases, in varying amounts. One cubic foot of natural gas produces 1031 British Thermal Units (BTUs). In the natural gas industry the production is generally measured in cubic feet or meters while the consumption is measured in BTUs. Natural Gas comes in 4 basic forms: Liquefied Natural Gas (LNG) - Natural Gas, which has been liquefied at (Minus) 160 degree Centigrade. Natural Gas is liquefied to facilitate transportation in large volumes in cryogenic tankers across sea. Regasified Liquefied Natural Gas (RLNG) LNG Re-gasified before transporting it to consumers through Pipelines. Compressed Natural gas, CNG - Natural Gas compressed to a pressure of 200-250 kg/cm2 used as fuel for transportation. CNG decreases vehicular pollution on the virtue of being cleaner fuel than liquid fuels. Piped Natural gas, PNG - Natural Gas distributed through a pipeline network that has safety valves to maintain the pressure, assuring safe, uninterrupted supply to the domestic sector for cooking and heating / cooling applications.
Sector Generation of electricity by utilities Fertilizer Industry Industrial Domestic and commercial Automotive Petrochemicals Natural Gas is used As fuel for base load power plants In combined cycle/co-generation power plants As feed stock in the production of ammonia and urea As an under boiler fuel for raising steam As fuel in furnaces and heating applications For heating of spaces and water For cooking As a non-polluting fuel As the raw material from which a variety of chemical products e.g. methanol, are derived

India's natural gas scenario is undergoing rapid changes and gas is poised to occupy a significant share in the energy mix. In order to diversify energy

Demand Supply Outlook

As per British Petroleum Statistical Review 2010 Natural gas accounts for about 10% of India's energy basket which is forecast to reach 20% by 2025. It is also expected that by 2015, the Indian gas market may be likely to be as large as that of Japan. Current consumption of gas in India is around 170 mmscmd. The power sector is the anchor customer for the gas sector, consuming 38% of the total supply while the fertilizer sector consumes around 25%
Consumption of Natural Gas by Sector ( in MMSCMD) Sectors Power Fertilizers CGD/CNG Refineries Sponge Iron/Steel Petrochemicals Other uses LPG and C2-C3 extraction Internal Consumption in Pipelines Total

FY'10 56.42 37.37 6.54 12.29 6.49 6.79 11.72 6.52 2.01 146.15

Jun-11 61.41 37.74 7.9 19.77 7.01 5.67 17.01 9.18 2.47 168.16

Currently, India has a substantial demand for gas that has been estimated to rise, with estimates in excess of 370 mmscmd by 2016/17. As domestic gas discoveries are expected to be limited, the demandsupply gap is expected to continue due to non-availability of domestic gas. Significant investment have already been made in the power, fertilizer, petrochemical and other areas such that it is most likely that there will be a sustained increase in the level of natural gas consumption in the country. Between FY'12and FY'13 an additional 12,200 MW of gas based power capacity is expected to be commissioned which will require commensurate additional supply of natural gas. In the fertilizer sector 3.8 mmscmd of natural gas would be needed for the conversion of LSHS/FO based fertilizer plants to gas based. In 2012 or shortly thereafter, another 8.45 mmscmd of natural gas will be needed for the changeover of naphtha based fertilizer plants to gas based. Further, de-bottlenecking and unmet demands of 4.10 mmscmd exist. In addition, there is further possible demand from new urea projects The total demand for natural gas is likely to exceed 300 mmscmd by FY'15 and more than 370 mmscmd by FY'17. It is estimated by the Department of Fertilizers that further capacity of 8 million tonnes of urea involving six projects is in the pipeline, which would require additional 14.4 mmscmd.
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In the power sector, further gas-based capacity of 20,000-25,000 MW is being considered which would involve an additional gas requirement of 80100 mmscmd. The domestic production of natural gas is significantly less than that of consumption, being about 75 per cent of domestic consumption needs. Imports in the form of LNG account for the balance The proportion of imported natural gas to total consumption is quite likely to increase from the present level of 25 per cent to around 40 per cent if not higher. Optimistic Projections of Output of Natural Gas (MMSCMD)
Year FY'11 FY'12 FY'13 FY'14 FY'15 FY'16 FY'17 ONGC 58.9 68.7 73.1 75.1 75.0 102.0 99.8 OIL 9.0 10.4 10.8 11.0 11.3 11.6 11.7 PSC 78 75.5 104.3 106.5 109.2 116.3 126.5 CBM 0.1 0.4 3.4 5.8 7.4 8.6 9.3 Total 146 155 191.6 198.4 202.9 238.5 247.3

LNG
Around 200 million tonne per annum (mtpa) of LNG is produced and exported globally by some 17 countries. Qatar is the largest LNG exporter in the world with an installed capacity of 77 mtpa. The other major LNG producers/exporters are Malaysia, Indonesia and Australia. Australia is in the process of adding large LNG capacities and is expected by 2015 to rival Qatar as the pre-eminent LNG exporter. Of the total LNG produced globally, around 7075 per cent is consumed in the Asia-Pacific region. The five major importing countries in the Asia Pacific are Japan, South Korea, Taiwan, China and India. The balance 25 per cent volume of LNG is consumed in 22 other countries, mostly in Western Europe, including Spain, France, UK and Belgium. Re-gasification capacity in the world is around 560 mtpa with the US alone having re-gasification infrastructure of about 140 mtpa. Current LNG re-gasification capacity in the country is 15 mtpa (12.5 mtpa at PLL's terminal at Dahej, and 2.5 mtpa at Shell's terminal at Hazira). While current capacity at the Dahej terminal is deployed for importing LNG from Qatar and short-term supplies from other sources, the Hazira terminal sources spot cargoes. Out of current total LNG imports, 63 per cent is imported on firm contract basis while 37 per cent is imported on spot basis. Beyond
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this 15 mtpa capacity, PLL is adding another 5 mtpa terminal at Kochi, RGPPL plans to add a 5 mtpa terminal at Dhabhol, GSPC-Adani plans to add a 5 mtpa terminal at Mundra, and IOCL plans to add a 5 mtpa terminal at Ennore. According to GAIL this will take the total regasification capacity in the country to 37.5 mtpa (around 135 mmscmd). There are also possibilities of a terminal in Mangalore and another in the East Coast.

Upcoming Domestic LNG Terminals

Terminal Dabhol Kochi Mundra Ennore Mangalore Promoter Ratnagiri Gas and Power Projects (RGPPL) PLL Adani Group and GSPC IOCL ONGC Capacity (MTPA) 5 2.5 in Phase I, To be increased to 5.0 5 2.5 in Phase I, To be increased to 5.0 2.5 Expected timelines 2011-12 2012-13 2014-15 2014-15 2014-15

Sector Wise Projected Gas Demand In India

Petronet LNG: Brief Description

Petronet LNG is at the forefront of India's all-out national drive to ensure the country's energy security in the years to come. Formed as a Joint Venture by the Government of India to import LNG and set up LNG terminals in the country, it involves India's leading oil and natural gas industry players. Our promoters are GAIL (India) Limited (GAIL), Oil & Natural Gas Corporation Limited (ONGC), Indian Oil Corporation Limited (IOCL) and Bharat Petroleum Corporation Limited (BPCL). The authorized capital is Rs. 1,200 crores ($240 million).

What Directors have to say?

While presenting 13th Annual Report directors were pleased to state that company was instrumental in mitigating shortfall and deficit of domestic gas availability. Company owns and operates countrys first and largest LNG terminal in Dahej, Gujarat. The Companys main thrust is on catalyzing the growth of Indian gas sector through enhancing the gas supply to satisfy the needs of existing consumers as well as to develop new consumers.

Financial Performance:The company has achieved substantial growth in both turnover as well as profit. The turnover during the year under review was Rs. 13197.28 Crores against Rs. 10,649.09 Crores in 2009-10. Gross margin stood at Rs. 1464.04 Crores against Rs. 1,082.16 Crores in the previous year. Net profit during the year was Rs. 619.62 Crores against Rs. 404.50 Crores in the previous year. The emphasis on higher capacity utilization, higher sales and better operational efficiencies led to increased profitability.

Dividend:Keeping in view the consistent performance and financial position of the Company, the Directors are pleased to recommend a dividend of 20% on the paid-up share capital of the Company for this year.

LNG SOURCING
With an aim to quench India's growing gas demand, stemming primarily from high-priority sectors such as power and fertilizer, and armed with expanded facilities at the Dahej LNG Terminal, the Company has been engaged in sourcing additional volumes of LNG on longterm, medium-term and spot basis for its downstream customers. It also has continued to maintain excellent relations with most of the global LNG suppliers for import of LNG supplies. It intends to diversify sources of LNG to ensure security of supplies. For the unutilized capacity at Dahej LNG Terminal as well as for the expected capacity at the Greenfield Kochi Terminal, the Company is in constant touch with various LNG suppliers to source LNG volumes beyond the present 7.5 MMTPA imported from Qatar. To meet the growing additional requirement of natural gas in country, the Company has also executed short-term deals with various global LNG suppliers for approximately 1.5 MMTPA.

Direct Marketing of LNG

For consumers not connected with gas pipe, the Company has initiated steps to market the LNG directly to consumers across the country through overland transportation using LNG trucks/ hubs. The concept makes use of the already existing road network as against setting up of complex pipeline network.

FINANCING
During the year, the Company has re-financed its entire long term rupee loan of Rs. 3,000 Crores from a consortium of Indian lenders. In the process, the Company could achieve substantial top side works for the same savings in its interest costs.

Plans
Considering the substantial demand of natural gas in the country, the Company is planning to construct one more LNG terminal on the east coast. The Company has already assessed the market demand in the region, is now looking for a suitable location, and would initiate Detailed Feasibility Report for building a LNG Terminal on the east coast.

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Ratio Analysis
Liquidity Ratios:S.No 1 Ratio Current Ratio Formula Current Asset/ Current Liability Liquid Assets/Quic k Liability Cash and its equivalent /Current Liability Net Credit Sales/ Account Receivables Net Credit Sales/ Inventory Credit Purchase/ Payables Num.(2010) In Lakhs 1,38,745.69 Den.(2010) In Lakhs 1,03,480.62 2010 1.34 2009 1.64

Liquid Ratio

1,13,947.74

1,03,432.23

1.10

1.34

Absolute Liquid Ratio

29,230.85

1,03,383.84

0.28

0.67

Debtor's Turnover Ratio

13,10,574.67

84,716.89

15.47

21.06

Inventory Turnover Ratio Creditor's Turnover Ratio

13,10,574.67

24,797.95

52.85

47.70

11,80,120.49

83,168.03

14.19

15.99

Observation:Since oil and gas sector is capital-intensive industry, it bound to have such liquidity position.

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Analysis:1. Current ratio for current year got diminished by 30% from previous year. This is because current liability for current has increased by 39% while increment in current assets is just of 13.5%, which is not good.

2. Similar is the reason for reduction in liquid ratio as inventory is almost same in both years.

3. Absolute liquid ratio has reduced by 39%.This happened because capital blocked with sundry debtors who have not paid from 6 months has increased by 68.26% from previous year which is adversely affecting the cash cycle.

4. Increment in deferred payment has affected Debtors turnover also. In 2009-10, company was able to recover payments in 17 days, which has now increased to 23 days. May be company is giving relaxation to debtors to increase sale because sale in 2010-11 rose by 23.60% from previous year. Therefore, this is helping company.

5. All turnover ratios signify that Management has done some change in policies with regard to stocks and debtors. Stock keeping period has reduced from 8 days to 6 days while payment collection period has increased from 17 to 23 days. That company has adopted liberal credit policies with customers. In addition, suppliers are also following liberal policy for the company.
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Profitability Ratios
S.No . 1 2 3 4 Ratio Gross margin Operating margin EPS Payout Ratio Formula Gross Profit./Sales*100 GP-Operating exp./Sales Net Profit/Total no. of shares DPS/EPS Num (2010) In Lakhs 1,27,397.91 1,12,472.79 61,961.53 2.00 Den (2010) In Lakhs 13,10,574.67 13,10,574.67 75,00,00,044 8.26 2010 9.72 % 8.58 % 8.26 0.24 2009 8..66 % 7.54 % 5.39 0.32

Analysis:1. Gross margin for the company has increased by 1.06 % this year due from previous year. This shows that company is performing well and is earning more revenue. 2. Operating margin has also increased by 1% from previous year. This shows that by increasing sales, operating expenses did not raise much. May be no additional setup cost was incurred. 3. Earnings per share rose by 53 %.This is very positive sign for equity investors 4. Although Earnings per share have increased by 53% but dividend was paid similar to previous year because right now company have expansion plans and all additional profit it is mobilizing in development of Kochi Project and expansion of Dahej Project Summary:-All together profitability of company is increasing year by year

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Return On Investment Ratios

SNo Ratio Formula Num (2010) In Lakhs Den (2010) In Lakhs 2010 2009

Return on Asset Return on Total Capital Employed

3 4

Return on Equity P/E ratio

EBIT/Total Assets EBIT/Total Capital Employed Net Income /Stockholder Fund MPS/EPS

90,641.53

7,45,765.49

0.12

0.13

90,641.53

6,24,429.29

0.15

0.15

61,961.53 121.8

2,68,015.53 8.26

0.23 14.74

0.18 14.10

Note:-for P/E ratio I took stock price of 31st Mar 2011 and 31st Mar 2010 respectively which are 121.8 and 78.

Observation: Returns obtained in 2010 are somewhat same as that were in 2009.

Since total assets have increased in 2010 from 2009 because new fixed assets were purchased and also large amount of capital is invested in equity and mutual fund due to which return on it has reduced from 2009

However, due to increase in net profit which in turn is consequence of high sales, return on equity shareholder funds have increased by 5% from last year, which is good sign as it enhances confidence of shareholders.

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Profit Coverage Ratios

SNo Ratio Formula Num (2010) In Lakhs Den (2010) In Lakhs 2010 2009

1 2

Dividend coverage Interest coverage

NPAT/Dividend Paid EBIT/ Interest Expenses

61,961.53 1,09,954.62

15,000.37 19,313.09

4.13 5.69

3.08 4.73

Note:-From Profit and Loss Account

Observation :Dividend Coverage Ratio as well as Interest coverage ratio are showing increasing trend .This signify that the company has good profitability condition.

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Capital Structure Ratios

SNo Ratio Formula Num (2010) In Lakhs 1 2 3 Total debt ratio Total debt to equity Long term debt to equity Total Debt/Total Capital Total Debt/Shareholder Equity Long Term Debt/Equity Capital 321613.76 321613.76 3,03,557.76 6,24,429.29 2,68,015.53 2,68,015.53 0.52 1.20 1.13 0.49 1.12 1.03 Den (2010) In Lakhs 2010 2009

Note:-Schedule 1&3, Page 33 and 35 of annual report

Petronet LNG is high geared company because more than 50% of its capital structure is supported by debt. Reasons:-

1. Right now company is in expansion mode that is it is opening new LNG terminal in Kochi. In addition to that company is also expanding their old lng terminal at Dahej ,Gujarat. Therefore large amount of capital is required by company to achieve their plans

2. That is why company is more dependent on debt rather than equity

3. Also ,since it is public sector company, it cannot offer large amount of outstanding shares as it will dilute its ownership

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Cash Flow Analysis

A. Cash Flow arising Operating Activities:The Cash Flow statement gives us the information about the availability of cash with company at any given time. If we look at cash flow from operating activity, it is on positive side which indicates that the company is prompt in collecting the amount due from customers .This signify that even after being highly cash intensive company and despite of lot of export import involvement, management has managed operating cycle effectively. Working capital position is comfortable since the current assets are more than current liabilities but since company is following liberal credit policy than previous year due to which receivables have increased. In addition, inventory has increased and current liability has increased from previous year, due to which net cash from working capital change is negative.

Reason: This is because company is spending lot of capital on their Kochi Project and lot of engineering and project construction is happening there. Along with Kochi project, company is also expanding theirDahej Project and lot of advances are mobilized there.

B. Cash Flow on Investing Activities

The company has purchased invested Rs. 88,888.67 Lakhs in purchasing fixed assets. These fixed assets are not been purchased by selling old fixed assets, as it is not much financed by adjustment of fixed assets. The company is investing large amount in trade and non-trade activities and has bought equity shares of Adani Petronet Port Services in large amount and PLL have common shares of India LNG Transport Company. It has earned Rs 2,469.31 Lakhs dividend this year.

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 The company is also dealing in Govt Securities and has earned Rs 1,386.29 Lakhs interest. The company is highly active in mutual fund market and does lot of sale and purchase of mutual funds. This year company has invested Rs. 981,213.72 Lakhs in mutual fund and most of it is funded by selling previous mutual funds holding worth of 919,149.25 Lakhs Summary:-All together, the company has observed more of cash outflow than inflow on its investments.

C. Net cash flow on financing activities

The company has further indebted itself. And has taken more secured loan of worth Rs 93,570.69 but it has repaid small chunk of secured loan of worth Rs. 20,000 Lakhs to reduce some financial charges. The company has also repaid 20,000 Lakhs short term loans. Although due to large amount of debt company enjoys tax shield but it should change its capital structure by infusing more common equity so that it can reserve long term capital and do not have to pay so much interest. Also due to such a large amount of debt, equity shareholders expectation also increases, as they feel unsecured.

Summary
The company seems to be in sound liquidity position. We can assume that the company has sufficient cash reserve to take the expansion plan smoothly

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Conclusion
After conducting ratio analysis as well as cash flow analysis, I found that Petronet LNG has good financial health and in fact it outperform it competitor. The salient features are as follows:1. Stock price of Petronet LNG increased to Rs.123 on Mar 2011 from Rs.78 in Mar 2010.In fact currently it is priced at Rs 161.That is year on year ,the companys share is giving excess returns to the investors

2. LNG sector is a booming sector as day by day its demand is increasing domestically as well as in abroad. That is why company is in expanding mode to fulfil the domestic demand of LNG. So new terminal is constructed in Kochi and Dahej terminal is also expanded

3. Petronet LNG is successfully serving its purpose of fulfilling the needs of its parents company which are ONGC,GAIL, IOCL as well as BPCL.

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