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Utilisation has bottomed out, recovery to be gradual though!

We met the management of Petronet LNG (PLNG) (on December 16, 2022) to get a sense of the state of the business and its latest outlook. Presented below are key takeaways:

* Volumes remain muted, TOP penalties can get triggered by the end of CY23E: Near-term volumes remain stressed, specifically with respect to third-party Regasification volumes which were based on spot LNG contracts. Of the 17.5mt capacity, 8.25+4mt or 12.25mt is based on long-term contracts, which remains unaffected by the extreme price volatility seen in spot LNG prices in the last six months. For the shortfall that is evident in CY22 (shortfall of 0.3mt, assuming 3.8mt is sold over Q3FY23), PLNG has indicated that it does have a recourse to impose Take or Pay (TOP) penalties but it would actively look at deferment options given the reality of the macro environment and unprecedented pricing anomalies in the market.

* Despite Russia–Ukraine crisis, volumes may recover over FY24-25E: Going forward, PLNG expects global supply situation to improve, with an improvement in Mozambique security situation, US FIDs and Qatar’s additional capacity to help ease the global supply balance (as per IGU, against just 6.9mtpa of global export capacity in CY21, CY22 -CY26 is likely to see aggregate 138.5mt of capacity addition, with Jan – April 2022 alone seeing ~12.5mtpa of export capacity addition – see link). This coincides well with the completion of 5mtpa of additional capacity at Dahej and the completion of the Kochi – Bangalore leg of Kochi offtake pipelines. 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

* Returns from capital allocation to take time: PLNG is investing Rs35bn on a third jetty at Dahej, two storage tanks, 5mtpa brownfield expansion at Dahej, and additional Rs23bn investment in 4mtpa FSRU LNG terminal at Gopalpur on the East coast. Additional plans to add a 750kta petrochemical plant for an investment of ~Rs120bn are also material and with ~0.25mt of demand already tied up with an anchor customer. Also, the company is in the volume renegotiation with RasGas (for the long term supply contract of 7.5+1mtpa expiring in CY24) and is aiming to secure at least 1-2mtpa of additional volumes as part of the renewal to fill additional capacity in place by then.

* Upgrade to HOLD: The stock has underperformed Sensex by 9% over the past 12 months and valuations are unchallenging, at 9.2 FY24E P/E, 5.4EV/EBITDA coupled with a 6.5% dividend yield (FY24E). While near-term earnings constraints remain, we believe earnings have bottomed out and over the medium term, the combination of stronger volumes and some moderation in LNG prices, along with higher capacity will ensure earnings growth. We upgrade the stock to HOLD, with a revised TP of Rs210/sh. (earlier TP of Rs 186/sh) Key upside risks: Stronger utilisation, sharp reduction in LNG prices. Key downside risks: Higher disruption of Russian supplies, slower execution of expansion plans.

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