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Buy Petronet LNG Ltd For Target Rs.270

* Q1FY22 standalone EBITDA/PAT were down 3%/up 2% qoq (up 16%/22% yoy) at Rs10.5bn/Rs6.36bn, beating our estimates by 4%/7% on account of a 2% beat each in volumes and margins, and lower-than-expected depreciation.

* The Dahej terminal operated at 88% capacity (vs. 85% est). Long-term volume fell 13% qoq but tolling was steady (up 2%). Kochi utilization was 24% (vs. 27% est). PLNG’s total volumes were down 4% qoq at 209tbtu (or 4.1mmt and up 10% yoy).

* Implied spot LNG marketing margin was USD2.1/mmbtu (inline). EBITDA/mmbtu was up 1% qoq at Rs50.4 (up 5% yoy). Margins were supported by Rs5.52bn regas income in Q1. Other expenses were 23% above estimate at Rs1.6bn due to forex losses.

* We cut FY22E/23E/24E EPS by 2%/3%/4%, assuming lower volumes due to rising domestic gas supplies and high spot LNG prices. We lower the TP by 7% to Rs270 from Rs290 as we roll over to Sep’22E from Mar’22E. Maintain Buy but with an EW stance.

Highlights:

Spot LNG volumes at Dahej rose from 5tbtu to 6tbtu, while regas volumes in Kochi also grew by 1tbtu qoq. Employee costs were 8% above estimate (up 19% yoy/flat qoq) at Rs429mn. Depreciation was 7% lower at Rs1.9bn, partly offset by a 5% miss in Other Income at Rs685mn. Interest costs fell 2% qoq to Rs800mn. Gorgon volumes at Dahej stood at 6tbtu. The share of profits from JV (Adani Port) rose to Rs364mn from Rs146mn in Q4FY21. The Kochi regas tariff reset is still under discussion. The use-or-pay dispute resolution is pending (Rs1.44bn yet to be paid; Rs545mn paid under protest by three customers for a fouryear period). There was no new update on the Kochi tariff reset. 5% hike was taken in Apr’21.

Guidance:

PLNG will try to make up for lost volumes ahead. Q2 should be good with Dahej utilization at 90-95% in Jul’21. Spot LNG prices are high now at USD16.5/mmbtu. Term LNG is cheaper at ~USD9 and customers are looking to shift. PLNG has 16.5mmtpa of capacity booked, incl. a 0.75mmtpa 2-year contract. PLNG does not see much volume upside at Kochi for the next 1-2 years (till Bangalore connect).

Qatargas contract renewal has to be decided by CY23. It is a good contract and should be extended but T&C should reflect today’s reality, including pricing. Capex target for FY22/23 is Rs5-7bn/Rs10bn. Q1 capex was not significant. PLNG may maintain the current dividend payout for FY22/23. Dahej capex would be ~Rs40bn till FY24-25, with Rs12.4bn/Rs17bn/Rs10bn on new tanks/jetty/expansion (to 22.5). The addition of CBG plants and LNG stations will be in a phased manner, with feed-feasibilityprofitability-IRR tested before scaling up. PLNG expects assured margins with 16% IRR. Capex will be on dispensers.

Valuation:

We value PLNG using DCF. Our TP implies a 13.5x Sep’23E target PE multiple. Key risks are adverse petroleum/gas prices, slowdown, competition and capital misallocation.

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