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Volume worries loom; capital allocation remains a key monitorable

Petronet LNG (PLNG) has reported 14% YoY decline in EBITDA to Rs11.7bn (up 10% QoQ) and 10% YoY dip in net adjusted earnings to Rs7.4bn in Q2FY23, above our estimates of Rs9.4bn EBITDA and Rs5.8bn PAT. YoY earning decline was due to 19% YoY decline in Dahej volumes and higher opex of 57% YoY, even though both came above our estimates. Reported PAT of Rs7.4bn was, however, helped by Rs0.08bn incremental inventory gain YoY (total gain of Rs1.2bn in the quarter) and a stronger other income of Rs0.9bn in Q2FY23 (up 15% YoY, down 34% QoQ). Overall volumes at 192tbtu declined 20% YoY and 8% QoQ, reflecting weaker supply availability of LNG in Asia/weaker demand in India. Overall gross margin at Rs84.8/mmbtu was up 2% YoY, 5% QoQ. EBITDA/mmbtu at Rs61/mmbtu was up 8% YoY, 19% QoQ, with sharply higher gross margin and higher marketing margin. Prospects for H2FY23E remain weak, with high LNG prices, restart of competing Dabhol terminal (Maharashtra) and a constrained supply environment to keep earnings subdued. TP and earnings remain unchanged; maintain REDUCE.

* Volumes weak in Q2FY23, but worries loom ahead: Dahej (Gujarat) long-term volumes were up 1% YoY and 2% QoQ to 103tbtu while service volumes at 77tbtu were down 34% YoY and up 18% QoQ. Spot cargoes were just 2tbtu (-67% YoY, +2x QoQ). Kochi volumes of 10tbtu were muted, down 33% YoY, down 17% QoQ. Overall volumes of 192tbtu (-20% YoY, -8% QoQ) were below estimates of 195tbtu. We see weak prospects for H2FY23-FY24E as well due to i) very high LNG prices that are dampening demand and ii) prospects of stronger domestic output.

* Expansion may not yield returns; overseas plans have not fructified: PLNG is still investing Rs35bn on a third jetty at Dahej, two storage tanks and a 5mtpa brownfield expansion at Dahej, PLNG also announced a Rs23bn investment in 4mtpa FSRU LNG terminal at Gopalpur on the East coast. However, all these investments still fall short of redressing concerns about utilisation of cash in the absence of any other material plan to reward shareholders (dividend yield at ~9% including interim dividend announced in Q2). Additional plans to grow the LNG retail business (only 4 pilot plants to start operations in FY23E), bio gas plants (stuck due to land availability constraints) and petrochemical venture (steep IRR hurdle rate of 16-17%) are all either at a nascent stage or immaterial to alter the scale of overall operations over the next 12-18 months.

* Maintain REDUCE: Stock price has underperformed Sensex by 12% over the past 12 months and valuations are unchallenging, at 9.6x FY24E P/E, 5.6x EV/EBITDA. We do not see any material traction in earnings over FY22-24E, with our estimates implying a muted earnings decline rate (annualized) of ~2% over the period. Our REDUCE rating stays with limited triggers over medium term, stagnant capital utilisation and higher competition from new terminals.

* Key risks: Stronger utilisation, sharper ramp up at Kochi, softer than expected LNG prices

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