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“Use/Pay” charges boosted profit, beat earnings.

PLNG posted a gross profit of Rs19.2bn (+1% YoY and +34% QoQ), 40% above our estimates. Gross profit boosted mainly due “Use or Pay” charges of Rs8.5bn as operating income. Trading margins/inventory valuation gain of Rs250mn/Rs950mn supported gross profit. Total re-gas volume of 167tbtu (-20% YoY & -13% QoQ), 6% below our estimates. Dahej utilization declined to 69% vs 81% in Q3FY22 mainly due to fall in tolling volume. Kochi utilization improved to 21% vs. 16% in Q2FY23. EBITDA of Rs16.7bn (-3% YoY but +43% QoQ), 49% above our expectations. Net profit of Rs11.8bn (+3% YoY & +59% QoQ), 67% above our estimates. In Jan’23 Dahej utilization has touched to 81% on the back of fall in spot LNG prices. We expect Dahej/Kochi terminal utilization to improve in light of falling spot LNG price (Jan’23TD– US$20/mmbtu vs. Q3FY23 US$31/mmbtu), we also incorporate “use or pay” charges for FY23E. Hence, We increase our EPS estimates for FY23E?25E in the range of 2%?8%. Retain ADD rating with revised DCF based target price of Rs234 (Rs223 earlier).

“Use or Pay” & trading gains to support earnings in FY23; Volume recovery in FY24 

Since spot LNG prices have shot up for the last 4 quarters, PLNG has proved its ability to post higher trading margins on spot LNG and also charged “Use or Pay” in Q3FY23 to offtakers (Rs8.5bn for CY22). This has boosted 9MFY23 earnings despite lower volume/utilization at Dahej terminal. In last few weeks spot LNG slumped to US$20/mmbtu, which led to Dahej utilization >80% in Jan’23, we expect volume recovery in FY24 & FY25 on the back of 138MMTPA global LNG export terminal are under construction to ease the global LNG supply balance. In a near term, we see Russian gas supply remaining a key monitorable over the course of the ongoing conflict, but as long as disruptions to their supply remain at current levels, additional LNG supplies will ease pricing pressures in medium term.

Brownfield expansion plans are highly cost competitive

Petronet LNG (PLNG) has an operating capacity of 17.5mmtpa at Dahej with ~90% capacity being tied on “take or pay” and “use or pay” contracts. PLNG has plans to scale up capacity up to 22.5mmtpa in next 2 years. PLNG’s latest expansion plans of 5MMTPA at Dahej are highly cost competitive, it would cost only Rs23bn including a new jetty (vs. any new greenfield expansion of 5MMTPA can cost ~Rs50bn). Return from allocation of new fundsto Gopalpur FSRU plan and Petrochemical project (Rs130bn) at Dahej will take time. As per the company’s assessment, equity IRR of these new projects would >16%.

Maintain ADD

Our DCF estimates assume PLNG Dahej utilization in the range of 90%-95% over FY24- 25E with lower Kochi tariffs from FY23E. We value PLNG on DCF (WACC ~12.0%) and arrive at a revised TP of Rs234 (earlier Rs223). Derived target price implies multiples of 9.1x FY25E P/E. Stock offers attractive dividend yield of 5.4%/5.8% in FY24E/FY25E. We estimate PLNG to clock a earning CAGR of 11% over FY23E-FY25E with stable return ratio. Thus, we maintain stock to “ADD” with Revised target price of RS234 (earlier Rs223).

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