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Volumes above expectation; valuation attractive

* PLNG’s standalone adj. Q2FY22 EBITDA/APAT of Rs13.6bn/Rs8.72bn beat our estimates by 20%/24% (flat/down 6% yoy; up 29%/37% qoq). EBITDA was higher due to an 8%/11% beat in volumes/margins, driven by gross spreads.

* The Dahej terminal operated at 101% capacity (vs. 93% est). Dahej imports were supported by an 18% qoq jump in tolling volumes at 117tbtu. Long-term volumes also rose 15% qoq to 102tbtu. Kochi utilization was 23% (vs. 22% est), with volumes largely flat qoq.

* Implied spot LNG marketing margin was USD5.5/mmbtu (2x above est), though adjusted for IndAS 116, it was USD2.9. Adj EBITDA/mmbtu rose 6% yoy/13% qoq to Rs56.8. There was a Rs654mn provision in Other Expenditure, which bloated reported opex.

* We cut FY22E EPS by 5% due to the impact of the spot LNG spike, though we raise our FY23-24E EPS marginally. We raise the Dec’22 TP by 2% to Rs275 from Rs270 as we roll over to Dec’23E from Sep’23E. Maintain Buy but with an OW stance.

Highlights: PLNG’s total volumes fell 6% yoy but rose 15% qoq to 240tbtu (4.7mmt). Employee costs rose 66% yoy/31% qoq to Rs561mn (above est). Adj. Other Expenditure was up 13% yoy/down 16% qoq at Rs1.35bn (4% below est). The provision of Rs654mn pertains to past revenue booked for a customer with whom there was a use-or-pay charge issue, but it is now potentially settled through higher volumes elsewhere. Hence, PLNG has provided this Rs654mn in Other Expenses. Profits from JV (Adani Port) fell sharply to Rs49mn vs. Rs364mn in Q1FY22. A special interim dividend of Rs7/sh was declared.

Guidance: H2FY22 would see very few spot LNG cargoes, though prices are unsustainable and should normalize by Mar’22. PLNG has requested Qatargas to deliver 46 past outstanding cargoes as soon as possible, and discussions are underway. Based on the H1 run rate, it expects to do 16.5mmt in Dahej for FY22 but could also go higher. It has placed orders for two tanks at Dahej and the completion will take 40 months. The new east coast unit will be a FSRU with 1-2 years of installation time with Rs18-19bn capex. Qatargas had given 10.2% slope to China, Bangladesh, etc., so India is also looking at such terms for the renewal of the contract. For the Kochi tariff reset, PLNG is in discussion with parties and has asked them to take more volumes, based on which tariffs will be reduced. Kochi offtakers are paying less than the Rs87/mmbtu charge demanded for now. But once the matter is settled, the same will be adjusted. The use-or-pay issue with one customer has been potentially settled, though it is pending with the other two, but PLNG expects a solution soon.

Valuation: We value PLNG using DCF. Our TP implies a 13.7x FY23E target PE multiple. Key risks are adverse petroleum/gas prices, slowdown, competition and capital misallocation.

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