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Dahej expansion, Kochi connectivity medium-term catalysts

* Petronet LNG (PLNG) 2QFY25 EBITDA came in 9% below our estimates at INR12b. Dahej utilization was down 9pp QoQ at 102%, while Kochi utilization stood at 22% (flat QoQ). Reported PAT at INR8.5b was in line with our estimate. In 2Q, the company booked additional provisions worth INR1.1b related to use-or-pay (UoP) charges.

* The Dahej terminal expansion from 17.5mmt to 22.5mmt is expected to be completed by Mar’25, after which it will be available for use. Management guided for a minimum throughput of 20mmtpa from Dahej terminal in FY26. However, until now, there has not been any material progress on signing anchor customers for the expanded capacity. In 2HFY25, the management expects capacity utilization at Dahej to remain ~95%-100%. Recently, two tanks were commissioned at Dahej (taking total number of tanks to 8), which will be beneficial for storing and processing more cargo.

* PAT came in line with our estimate. In 2HFY25, utilization trends may be sensitive to spot gas prices, which remain somewhat high currently (Asia JKM averaging USD13.2/mmbtu in Oct’24TD). Going forward, the key catalysts will be 1) the commissioning of the expanded Dahej capacity, and 2) pipeline connectivity for the Kochi terminal. While the PDH-PP project and Gopalpur FSRU can support the future volume trajectory, we believe that economics of these projects are yet to be established and that they are longer-dated projects. As such, we maintain our Neutral rating with a TP of INR385.

PAT in line; capacity utilization remains robust

* 2Q revenue came in 7% below our estimate at INR130.2b (+4% YoY).

* EBITDA was 9% below our estimates at INR12b (-1% YoY).

* In 2Q, inventory gains stood at INR700b and trading gains stood at INR390m.

* Other income was INR2b (est. INR1.5b, INR1.6b in 2QFY24). As a result, reported PAT was INR8.5b (est. INR8.9b).

Operational performance:

* Total volumes stood at 239Tbtu (est. of 232.5Tbtu, +7% YoY).

* Dahej utilization stood at 101.7% (+7.7pp YoY), 4pp above our estimate. Kochi utilization at 22.2% (+7.7pp YoY) came in line with our estimate.

* In 2Q, PLNG provisioned INR1.1b for UoP dues. Additionally, PLNG has waived off UoP charges of INR706m.

* As of Sep'24, provisions on UoP dues stood at INR6b.

* UoP dues of INR17.2b (net provision INR11.2b) were included in trade receivables as of Sep'24. The company has obtained bank guarantees from customers to recover UoP charges for FY22 and FY23. The customers have not given balance confirmations toward these dues. However, the management is confident of recovering such charges.

* The board has declared an interim dividend of INR7/sh (FV of INR10).

Valuation and view

* PLNG’s volume utilization improved substantially in 1HFY25 amid moderate spot LNG prices and robust demand. While we remain positive about volume growth, we believe ongoing uncertainty around UoP provisioning and rising competition will prevent further re-rating.

* We value PLNG at 12x Dec’26E EPS to arrive at a TP of INR385. We reiterate our Neutral rating on the stock.

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SEBI Registration number is INH000000412