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Petrochemical expansion to hurt returns

Volume recovery: PLNG expects better global supply situation in medium-to-long term with improving Mozambique situation, US FID and Qatar’s capacity likely to rise. Fall in gas prices would push demand which would be served by increased capacity at Dahej and Kochi-Bengaluru pipeline. Of the total 17.5mtpa capacity, contracts for 15.75mtpa have remained unaffected by the volatility in spot LNG prices. Any shortfall in offtake would be compensated by take-or-pay penalties, thus protecting profitability. Rasgas renegotiation could boost volumes.

Higher utilization intact: Long term take-or-pay contracts end in 2036 and Rasgas sourcing contract in 2028, leading to stable long-term volumes. Kochi capacity ramp up was delayed due to lack of evacuation pipeline, however, it has been completed while Kochi-Bengaluru pipeline is still in progress. Dahej and Kochi terminals current capacities are 17.5/5mtpa. The current contracted volumes at Dahej/Kochi Terminal are 15.75/1.44mtpa, would lend key support.

Kochi Terminal: Current utilization rate of ~20% is expected to reach ~35% in medium term, further support will come from Kochi-Bengaluru Pipeline which is near commissioning. Kochi has abundant gas availability, leading to higher volumes and utilization rate, which would enhance RoCE substantially.

Dahej expansions: It is targeted to take Dahej Terminal capacity from current levels of 17.5mtpa to 20mtpa by end FY24 and 22.5mtpa by FY27. Two storage tanks at capex of Rs 12bn and capex of Rs 17bn for Jetty have been announced.

PDH-PP Plant: PLNG has announced a capex at Dahej for Petchem which is a non-core business for them. A Propylene capacity of 750ktpa will require ~882ktpa of Propane as a feedstock. ~250ktpa of the capacity will be sold directly into the market while the rest will be converted largely to Polypropylene and sparingly to Hydrogen. Plant location is in close proximity to demand areas. It will take ~4-yrs to get ready, commissioning is targeted by Oct’27 and expected life span is 25-yrs. Sale of 250ktpa of propylene and Hydrogen has been already finalized with Deepak Phenol. In terms of price movements, company claims to have some sort of hedging in place to protect pricing fluctuations. Project cost is Rs 207bn with Debt to Equity ratio of 70:30. Initial cost was Rs 140bn, which was adjusted upwards due to multiple factors (Currency depreciation: Rs 19bn, margin money: Rs 4bn, ethane handling: Rs 25bn, other costs: Rs 19bn) and has guided for IRR of >16%. We believe this escalation could hurt returns from core business, given volatility in petchem spreads and large upcoming capacity in domestic and global markets.

Gopalpur LNG terminal: It is a 4mtpa east-coast terminal, recently executed a binding document viz. (a) Sub-Concession Agreement (b) Sub-Lease deed and (c) Port Service Agreement) with Gopalpur Ports Ltd for setting up of FSRU. If PLNG is unable to get an FSRU, they may go ahead with a land-based LNG terminal (5mtpa); in that event, it would become the first LNG terminal on Eastern India soil to serve the Eastern market.

Dividend outlook: Cashflows are significant and should average higher than the capex targets for FY24-26e. With last 5-year average dividend payout of ~60%, we expect dividend payout to reduce (~35%) given multiple capex announcements.

Valuation: We believe earnings would record a ~2% CAGR over FY23-26, driven by the Dahej utilisation and a further ramp-up at Kochi. We initiate coverage with a REDUCE rating given limited potential, with a TP of Rs229, valuing the stock at 10x PER.

Risks: Sharp reduction in LNG prices, slower expansion plans, steep rise in domestic gas production, lower tariff from competition.

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