Buy Petronet LNG; target of Rs 354: HDFC Securities

HDFC Securities' research report on Petronet LNG

EBITDA came to Rs 9.11bn, -2.5/+45.2% YoY/QoQ, beating our estimate by 11.1% while PAT was 7.1% below estimates at Rs 5.60bn (-4.5/+27.3% YoY/QoQ). Deviations are owing to adoption of Ind AS 116 that has resulted in reduction in COGS by Rs 1.05bn and increase in depreciation and finance cost by Rs 1.68bn. Adjusting for Ind AS 116, the numbers were in-line. Kochi terminal: Utilisation stood at 14.1% versus 9.7/11.1% in Q1/Q4FY19. We expect gradual ramp-up in utilization to 25-30% by 4QFY20 post commissioning of the Kochi-Mangalore pipeline in Oct-19. Current tariffs were Rs 104/mmbtu. With a rise in utilisation, tariffs should cool down by 4QFY20E. Way ahead for Dahej: Services volumes jumped 23.3% QoQ to 2.2mmt (112tbtu). Surge in these volumes indicates that off-takers are capitalising on soft LNG prices. Although spot volumes were low, we suspect these will rise with (1) Spare capacity availability afte expansion, and (2) Persistently low LNG prices. Long term (LT) volumes: PLNG has sourced ~48% of RasGas volume in 1HCY19. Currently, spot LNG prices are at a ~48.8% discount to LT prices vs 19.4% in H1. This could lead to reluctance by offtakers for LT contracted volumes. We want to flag this concern. No competition threat: Strong backing of LT contacts with off-takers gives PLNG an edge over its competitors. Its current volumes at Dahej (est. ~86% of FY21 EBITDA) are protected via firm contracts up to FY28, including the contracted 5% YoY tariff rise. US assets: PLNG is exploring LT sourcing options in the US requiring an investment of ~USD 3bn. Key monitorables: Ramp-up at Kochi and spread between the spot LNG and LT prices.

Outlook

We maintain BUY on PLNG post a stable performance in Q1. Expected ramp-up at both terminals, predictable earnings from tied-up volumes and robust gas demand driven by benign spot LNG prices keep our faith intact.