Petronet LNG:

If we look at the market a year back, it mirrors the same today. It had hardly moved anywhere, whether you look at Nifty 50, Sensex 30 or NSE 500. So if you had invested your funds into any of these indexes at same proportion than you have just lost 10% of your funds purchasing power and if you are NRI or NRE who had invested in the Indian markets than on top of that you have lost another 10% of your funds purchasing power because of currency fluctuations.

It does scares for a fund management boutique like us who are standing at front of double edge sword.

But we are not scared of these facts as we have mitigated all those risks with our own brand style of investing. This has given us more confidence and affirmation that we are investing in the right way.

Time has changed, we are not in an era of 2002 – 2008 where if we pick any stock and it was giving a stunning returns! That tactics has not worked in 2009 – 2014 and you cannot invest in hope of getting that era back.

So, what differently we are doing and we believe that it will work in all market condition?

Being a nimble investor, we are only willing to invest on the very highest quality companies and the very best value, and being willing to sell and raise cash when stock prices reflects irrational exuberance, and when we don’t see anything such in market we prefer to stand aside doing nothing and not to jeopardise our returns by doing something stupid.

We do believe that overall market is fairly trading to 2015 valuations and from the overall market we think that Oil Exploration and production and gas sector are trading at a bit discount.

So what are the companies we are looking very closely before plunging our money? They are as follows:

  • Petronet LNG
  • ONGC
  • Oil India
  • Cairn India

All the above companies are investment grade quality and are trading a bit at discount. Let’s look at the Petronet LNG future prospects this time.

Petronet LNG is B1 Grade Company and for the year end 2013 the actual intrinsic value was Rs 187. They sold gas of worth Rs 31,500 Crore and their import bill was Rs 29,325 Crore. Their operating profit margin was 7% and profit before tax margin was 5.5%.

Their revenues grew by 39% in the 2013 year. In the year 2012 their operating profit margin was 8% and profit before tax margin was 7% and its revenue grew by 71%.

But suddenly their margins have come under threat, so far for the last nine months their revenues have grown by 19% and their operating profits margin have fallen down to 3.25% and profit before tax margins to 3%.

With growing competition and price fluctuations to import LNG has shrunk its profits margin.

Even the analysts who follow this business have downgraded their future profits growth in range of 10% -15%. Looking at the consensus expectations now we expect its fair value for the year 2014 to be around Rs 94 and for 2015 to be Rs 105.

We do not expect massive growth in their revenues of Petronet LNG and looking at their profit margins these days, even then it does not looks attractive proposition to invest with.

Previously we had advocated to look at this business as business proposition but with its current economic downturn we feel investors should be more cautious before investing in it and should do their thorough investigation.

Your thoughts are welcomed in regards to this business.