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Performance below expectations despite strong utilization

* Petronet LNG (PLNG) recorded lower-than-est. adj. EBITDA (ex of use or pay charges) of INR11b (our est. of INR12.5b) during the quarter. There was a sharp rise in ‘other expenses’ as the company allocated funds (amounting to INR2.3b) for certain provisions related to UoP in 3Q. Dahej utilization increased to 99% (vs. 70% in 3QFY23), while utilization at Kochi stood at 22% (up 160bp YoY).

* Management highlighted that it has successfully reached settlements with customers regarding UoP and has secured bank guarantees from them. Management also emphasized that if the target volumes for CY21 and CY22 are achieved by Dec’24 and Dec’25, respectively, PLNG would waive the UoP. However, if the targets are not met, the company would encash those bank guarantees received from the customers.

* The expansion of the Dahej terminal expansion from 17mmt to 22.5mmt is expected to be completed by Mar’25, after which it would be available for use. While there is no specific completion date for the petchem project, it has received board approval with a capex of INR207b. The management highlighted that the Coimbatore-Krishnagiri gas connectivity will be completed by the end of CY24.

* Volumes have improved substantially YoY in 9MFY24 amid cooling LNG prices. However, long-term volume growth prospects remain bleak for the company, due to intensifying competition from upcoming LNG terminals as well as increasing domestic gas supply.

* As highlighted in our previous report, sustainability of high return ratios also remains a key concern for PLNG as the ROCE for upcoming projects (Dahej expansion, Gopalpur FSRU and PDH-PP plant) is likely to be lower at 7-18%. Hence, we reiterate our Neutral rating with a TP of INR295.

Beat on volumes as utilization remains strong

* Total volumes stood at 232Tbtu (est. of 214.6Tbtu, up 39% YoY). Dahej Utilization stood at 99% (up 28.9pp YoY) and Kochi utilization stood at 22% (up 160bp YoY).

* Revenue stood at INR147.5b (up 7% YoY). EBITDA stood at INR17.1b (est. INR12.5b, up 2% YoY); adjusted EBITDA (ex of use-or pay charges) stood at INR 11b and was below our estimates.

* Reported PAT stood at INR11.9b (est. INR8.2b, up 1% YoY); adjusted PAT was below our expectations at INR 5.8b, partly due to strong 125% QoQ rise in other expenses.

* The sharp rise in ‘other expenses’ was likely led by receivables related to provisioning.

* Income related to “Use or Pay charges” (UoP) amounting to INR6.1b for CY23 was recorded in 3QFY24 under ‘other operating income’. This income was generated from lower capacity utilization by the company’s customers.

* Balance confirmation against UoP dues of INR8.5b for CY22 and INR4.2b for CY21 is yet to be received. PLNG has approved a recovery mechanism of UoP dues for CY21 and CY22, pursuant to in-principle agreement with the customers.

* The management is in the process of implementing the same with the customers, including obtaining bank guarantees to secure the UoP dues.

* For 9MFY24, revenue stood at INR389b (up 15% YoY) with EBITDA at INR41b (up 5% YoY). PAT stood at INR28b (up 7% YoY). 9MFY24 EBITDA stood at 79% of our FY24 estimate

Valuation and view

* Sustainability of EPS growth and high return ratios remain a concern for PLNG amid rising competitive environment. The net cash of INR57b (as of FY23) indicates that the deployment of cash may be an issue as growth opportunities in LNG terminalling have become bleaker and the company had to diversify from its core business to invest in more volatile areas such as gas-based petrochemicals, compressed biogas, as well as LNG trucking.

* The company currently trades at 11.6x FY25E EPS of INR23.1. We value the stock at 12x Dec’25E EPS to arrive at our TP of INR295. We reiterate our Neutral rating on the stock.

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