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Fundamentals to worsen; capital allocation key

Petronet LNG’s (PLNG) Q2FY22 EPS was down 6% YoY hit by fall in Dahej volumes and other income. Dahej Q2 annualised volumes were higher vs guided for FY22E, but Q3-Q4 volumes are likely to be lower than in Q2 due to sharply higher H2 spot LNG price. Raising FY22-FY23E Dahej volume to factor guidance and FY22E Dahej regas charge has led to upgrade in FY22-FY23E EPS by 13-3%. We raise target price by 8% to Rs231 mainly on upgrade in long term Dahej and Kochi regas charge. Overcapacity due to starting of new terminals in Gujarat and domestic gas output rise in FY23E are set to worsen PLNG’s fundamentals. However, RasGas supply may rise by 37% in FY23E if it supplies volumes not uplifted in CY15 and CY20. PLNG is cheap. How it uses its large cashflow may decide if it is de-rated or not.

* Q2 EPS down 6% YoY: Q2FY22 standalone EPS was down 6% YoY, despite 6% YoY rise in Dahej regas charge to Rs62/mmbtu, hit by 7% YoY fall in Dahej volumes to 4.5mmt (103% utilisation) and 49% YoY fall in other income. Kochi volumes were up 36% YoY. Consolidated EPS is down 6% YoY as profit share of investee fell 95% YoY.

* Earnings call takeaways: 1) PLNG agreed surge in spot LNG price was a headwind to volumes in H2, but it is confident of Dahej volumes at 16.5mmt (H1-Q2 annualised at 16.8-18mmt) in FY22E as guided in Q1 earnings call; 2) discussion is on with RasGas to deliver (in CY22E as per Bloomberg report) 46 cargoes, not uplifted in CY15 and CY20, but which need to be uplifted before contract expires in CY28; 3) in Q2 inventory gain was Rs280mn and gain due to INDAS is Rs390mn; 4) PLNG wants to extend long-term contract with RasGas beyond CY28 on similar terms (10.2% slope to Brent) to its recent contract with Sinopec of China; 5) issue of Kochi tariff cut demanded by offtakers remains unresolved, but PLNG will cut tariff retrospectively w.e.f 1-Apr’19 only if offtakers agree to offtake volumes on the terminal on use or pay basis; 6) capex of Rs12bn is guided for construction of two LNG tanks and Rs17bn for construction of jetty at Dahej with completion in 40 months; 7) East coast FSRU at the cost of Rs19bn is proposed and five LNG stations planned at Rs400-500mn.

* Raise FY22-FY23E EPS and target price: PLNG had in Q1 earnings call guided FY22- FY23E volumes at 16.5mmt. Therefore, we have raised FY22-FY23E Dahej volumes estimate to 16.5mmt from 16.1-16mmt earlier. We have also raised FY22E Dahej regas charge to Rs63/mmbtu (Rs54.3/mmbtu earlier) to factor in H1 trends. Net impact is upgrade in FY22-FY23E EPS by 13-3%. We have also raised target price by 8% to Rs231 (2% downside) on upgrade in long term regas charge at Dahej and Kochi to Rs65/mmbtu vs Rs60/mmbtu earlier and Kochi utilisation rate to 75% vs 64% earlier.

* Long-term fundamentals set to worsen from FY23E; Dahej volumes may get onetime lift: LNG terminals of HPCL and Swan (combined capacity of 10mmtpa) are set to start in Gujarat in FY23E leading to overcapacity; thus, any new volumes after contract with RasGas expires are likely to be at lower regas charge. Domestic gas output is set to rise to 45mmscmd by FY24E vs 18mmscmd now. Kochi terminal regas charge cut appears imminent. Only positive in FY23E may be RasGas delivering extra volumes.

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