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2025-08-11 12:09:37 pm | Source: Motilal Oswal Financial Services Ltd
Buy Petronet LNG Ltd for the Target Rs.410 by Motilal Oswal Financial Services Ltd
Buy Petronet LNG Ltd for the Target Rs.410 by Motilal Oswal Financial Services Ltd

Core business expansion to drive earnings

* PLNG’s 1QFY26 revenue came in line, while EBITDA was 5% below our estimate at INR11.6b. Marketing margins missed our estimate as spot volumes were nil for the quarter, owing largely to muted power demand. PAT came in line with our estimate as other income was above estimate. EBITDA/PAT, adj. for UoP provisions (INR1.4b), stood at 6%/20% above our estimates.

* Total volumes came in 6% above our estimate, primarily due to higher third-party and service cargos. Dahej utilization was 8% above estimates, while Kochi utilization stood 18% below est. We note that Spot LNG prices remain elevated at USD13/mmbtu in Jul’25’td (INR12.4/mmbtu in 1QFY26).

* We recently upgraded PLNG to BUY (Tide is turning, slowly) with a DCF-based TP of INR410. According to our DCF analysis (WACC: 11.2%), at CMP, PLNG is pricing in an unrealistic scenario of a 20% decline in tariffs at both the Dahej and Kochi terminals in FY28, with no tariff hike thereafter and 0% terminal growth. Additionally, the street narrative that competing terminals are taking away market share has not played out so far, as utilization at competitor terminals continues to languish at 14-43%. Moreover, the narrative has overlooked PLNG’s strong scale, historical capex, and connectivity advantages. While there are concerns around a potential tariff cut in FY28, we highlight that a sharp tariff cut at Dahej in FY28 can lead to industry-wide pressure, as competing terminals were built at ~2x the capital cost (Dahej capex/mmtpa = ~INR5b vs. ~INR9-11b for competitors). This would further increase the relative attractiveness of the Dahej terminal, especially as its expanded capacity comes online.

* At 9.7x FY27E P/E and 4% dividend yield, we believe valuations are at absolute rock-bottom levels. We now value PLNG using DCF-based TP (earlier 10x FY27E PE) and assume a 10% tariff cut in Dahej and Kochi in FY28, 4% escalation thereafter, 2% terminal growth, and 11.2% WACC, leading to a TP of INR410/share. While we build in full capex for the petchem venture, we value it at only 0.5x equity.

 

Highlights from the management commentary

* Drop in 1Q volumes at Kochi was due to a 1.5-month shutdown at a consumer plant, which reduced volume off-take by ~1mmscmd.

* The company has provided a capex guidance of INR50b for FY26, primarily allocated toward the third jetty, the upcoming petrochemical complex, the Gopalpur LNG terminal (INR3b), the new corporate office (INR1b), and over 25 compressed biogas (CBG) plants (INR1b). Capex in FY27 is expected to exceed FY26 levels.

* In 1Q, inventory gain stood at INR420m. Trading gains were nil during the quarter. Regas contribution stood at INR6.4b.

* The Gopalpur terminal is 35km away from a major trunk pipeline (GAIL’s Srikakulam Angul pipeline). Once connected, off-take will not be an issue.

 

Beat on volumes; performance largely in line

* PLNG’s 1QFY26 revenue was in line with our estimate at INR119b.

* EBITDA fell 26% YoY to INR11.6b (5% below our estimate).

* The company booked additional provisions of INR1.4b against UoP dues during the quarter. No UoP trade receivables were waived off during 1Q.

* Reported PAT was in line with our estimate at INR8.5b, down 25% YoY, supported by higher-than-expected other income. EBITDA/PAT, adj. for UoP provisions (INR1.4b), stood 6%/20% above our estimates.

* Spot LNG prices fell QoQ in 1Q, averaging USD12.4/mmbtu (USD14 in 4Q). Operational performance:

* Total volumes came in 6% above our estimates, primarily due to higher longterm and service volumes. No spot volumes were recorded during the quarter, mainly due to subdued power demand.

* Dahej utilization was 8% above estimates, while Kochi utilization stood 18% below est.

* As of Jun'25, provisions on UoP dues stood at INR6.1b.

* UoP dues of INR14.2b (net provision INR8.1b) were included in trade receivables as of Jun'25. PLNG has obtained bank guarantees from customers to recover UoP charges. While some customers have not given balance confirmations toward these dues, management is confident of recovering such charges.

* The board has approved an additional investment for setting up a 5mmtpa landbased LNG terminal at Gopalpur, Odisha, replacing the earlier approved 4mmtpa FSRU-based terminal. The revised project entails an overall investment of INR64b, including taxes and duties, with an incremental cost of INR40b over the previous plan, which will be financed through debt and equity. It is expected to be commissioned in the next three years.

 

Valuation and view

* PLNG trades at 9.7x FY27E EPS, compared to its historical one-year forward P/E of 10.9x. Under a variety of bearish scenarios, our DCF-based valuation implies - 4% to 21% upside from the current price. Our DCF-based TP of INR410 (WACC: 11.2%, TG = 2%) assumes a 10% tariff cut in FY28, followed by a 4% increase for both the terminals. While we have incorporated the full capex for the petchem plant, we value it conservatively at 0.5x FY29E P/B and discount this back to FY27.

 

 

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