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Margins boosted by cost optimization

Petronet LNG Ltd., (“Petronet”) was formed by the Indian government to import liquefied natural gas (LNG) and set up LNG terminals in India. The company operates two regasification terminals, situated in Dahej (17.5 MMTPA installed capacity) and Kochi (5 MMTPA).

* Petronet’s consolidated revenue grew 25.2% YoY to Rs. 15,776cr in Q3FY23, primarily due to higher realisation and recognition of Rs. 849cr ‘use or pay charges.’

* Due to solid cost optimization strategies, EBITDA margin expanded sequentially to 10.6% in Q3FY23 from 7.3% in Q2FY23.

* Although the worldwide macro uncertainties could affect the company’s performance matrix in the short term, robust deal book, better cost optimization, capacity expansion, enhanced utilisation and improved supply chain are expected to offset the situation. Hence, we remain positive on the stock and reiterate our BUY rating with a revised target price of Rs. 260 based on 10x FY25E adjusted EPS.

Capacity expansion to drive future growth…

In Q3FY23, Petronet’s revenue increased 25.2% YoY to Rs. 15,776cr (-1.3% QoQ), despite 19.7% YoY volume degradation to 167 trillion British Thermal Units (TBTU). The Dahej terminal processed 154 TBTU of liquefied natural gas (LNG) in Q3FY23 vs. 182 TBTU in Q2FY23 and 196 TBTU in Q3FY22, showcasing low current demand. At the same time, the Kochi terminal remained strong and processed 13TBTU vs. 10 TBTU in Q2FY23 and 12TBTU in Q3FY22. Due to high spot LNG prices, the company’s volume of LNG processed, and utilization levels declined. For the nine months to December 2022, volume processed stood at 567 TBTU, compared with 657 TBTU for the same period a year ago. The company has continued to increase its capacity at its Dahej and Gopalpur terminals with a positive demand outlook. The company has planned to have capex of about Rs. 13,000cr to Rs. 14,000cr, expecting the board approval in next six months

Key concall highlights

* The company is expected to increase its processing capacity by nine million tonne (mt), including 5 mt at the Dahej terminal in the next two years and 4 mt at the Gopalpur terminal in the next three years.

* Petronet’s management anticipates higher volume demand in the upcoming quarter, supported by expected LNG prices between $16-$20 per million British thermal units (mmBtu). • Management expects capacity utilisation to be about 80%-90% in the near term, while it is currently at 81%.

Strong sequential margin recovery

Due to solid cost optimization strategies, the EBITDA margin expanded sequentially to 10.6% in Q3FY23 (-310 bps YoY) from 7.3% in Q2FY23. Net profit margin expanded 267 bps QoQ (-162bps YoY) to 7.6%. PAT increased 52.3% QoQ (+3.2% YoY) to Rs 1,196cr, registering the highest-ever profit after tax in trading history, mainly due to high other incomes (+127% YoY) and ‘use or pay charges’ recognized in Q3FY23.

Valuation

Petronet successfully delivered its all-time high PAT disregarding inflated LNG prices and weak demand in international markets. We expect Petronet to deliver strong financial results through better cost-optimisation, capacity expansion, enhanced utilisation and improved global demand. We, therefore, reiterate our BUY rating on the stock with a rolled forward target price of Rs. 260 based on 10x FY25E adjusted EPS.

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