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Better margins drive profitability…

About the stock: Petronet LNG, a JV between leading PSU oil companies, is involved in LNG import and regasification.

* The company operates two LNG terminals at Dahej and Kochi

* Total nameplate capacity of the company is 22.5 MMTPA

Q2FY23 Results: Petronet LNG’s Q2FY23 earnings were better than estimates on all fronts

* Revenue increased 47.8% YoY to | 15985.7 crore (our estimate: | 13221.3 crore)

* Total volume at 192 tbtu was down 20% YoY (our estimate: 203.2 tbtu)

* Blended margin was at | 74.4/mmbtu, up | 9.7/mmbtu YoY. EBITDA was at | 1173 crore, down 9.6% YoY (our estimate: | 1009.1 crore)

* PAT was at | 744.2 crore, down 9.6% YoY (our estimate: | 618.4 crore)

What should investors do? With increase in domestic gas production, emergence of new terminals and higher LNG prices that are impacting Petronet’s volume, we expect the stock price to remain range bound in the near to medium term.

* We retain our HOLD rating on the stock

Target Price and Valuation: We value Petronet at | 215 i.e. 11x P/E on FY24E EPS.

Key triggers for future price performance:

* Petronet LNG is India’s leading play in import of LNG in the country and will be a beneficiary of the government’s aim to increase the share of natural gas in the energy basket to 15% over the long term

* The 17.5 mmtpa Dahej terminal has been booked for 15.75 mmtpa under long term, thus providing visibility to long term volumes. Increase in Kochi terminal utilisation can support volume pick-up

* LNG price trend to be key monitorable for offtake

Alternate Stock Idea: Besides Petronet, in our oil & gas coverage we also like Gail.

* Gail is India’s leading gas transmission company, which is a beneficiary of increasing gas consumption. Stable volume growth along with higher profitability from gas trading, petchem and LPG segment due to higher oil prices will add value

* It operates a natural gas pipeline network of 14500 km as of end of FY22

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