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Trading gains offset impact of higher LNG prices

PLNG  posted  gross  profit  of  Rs14.3bn  (?8%  YoY  but  +5%  QoQ),  10%  above  our estimates. Gross profit was boosted by super?normal trading margins of Rs2.7bn and inventory gains of Rs1.2bn. PLNG posted total re?gas volume of 192tbtu (?20% YoY & ? 8% QoQ), 4% above our estimates. Dahej terminal utilization declined to 81% vs 100% in Q2FY22 mainly due to 34% fall in tolling volume. Dip in Kochi terminal utilization to 16% vs 24% in Q2FY22 mainly due to no spot LNG volume. EBITDA of Rs11.7bn (down 14% YoY but up 10% QoQ), 12% above our expectations. Net profit of Rs7.4bn (down 10% YoY but up 6% QoQ), 15% above our estimates.  Board has declared an interim dividend of Rs7/share, which implies a dividend yield of 3.3% on CMP. As guided by company, in higher spot LNG price scenario, company is likely to post higher trading margins on LNG. We incorporate higher trading margins for FY23E & FY24E. This has increased our PAT estimates by 3%/5% in FY23E/FY24E respectively. However, we have maintained our FY25E estimates. We upgrade stock to “ADD” recommendation with revised DCF based TP of Rs223 (from earlier Rs207).

Trading gains offset impact of higher spot LNG prices on volume

Since the time spot LNG prices have shot up for the last 4 quarters, PLNG has showcased its ability to make super normal trading margins (Avg >Rs2bn) on spot volumes by using flexibility available in its contracts. Currently  Petronet’s  LNG  re?gasification  facility is running on “Grid Power” instead of consuming LNG and the same LNG is available for trading purpose. At the same time, LNG carrying vessels are also running on “Fuel Oil” instead of LNG. We expect this to sustain  for at least  for next  few quarters as long as spot prices remain high and post which lower spot prices should drive up the volumes.

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). Notably, Kochi, with of 5mmtpa will see effective utilization going up to 2mmtpa once Kochi?Bengaluru pipeline becomes operational by FY24E.

Upgrade to “ADD” Our DCF

estimates assume PLNG Dahej utilization in the range of 90%?95% over FY23? 25E with lower Kochi tariffs from FY23E. We value PLNG on DCF (WACC 12.0%) and arrive at a TP of Rs223. Derived target price implies multiples of 8.5x FY25E P/E. Stock offers attractive  dividend  yield  of  5.5%/6%  in  FY24E/FY25E.  We  estimate  PLNG  to  clock  a earning CAGR of 12% over FY23?FY25E with stable return ratio. Thus, we upgrade stock to “ADD” with Revised target price of RS223 (earlier Rs207).

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