Key takeaway: The likely lower spot LNG exposure in September (due to lower volumes) could result in a robust 2QFY22E EBITDA margin of ~ Rs 5/scm despite rising Spot LNG costs. But 2HFY22E Morbi volumes could also be capped at ~ 6 mmscmd (Mar 21: 7.5) in order to ensure Spot exposure within I/C at 25%. We have cut FY22E EPS by ~ 28% on lower volumes/margins (baking in $ 22 Spot LNG till winter and another Rs 5/scm hike) but have kept FY23-24E EPS broadly unchanged. Maintain ‘buy’.
Morbi volumes have reduced to ~ 5 mmscmd in September: As flagged post our industry expert call with the President of Morbi Ceramic Association in August, our recent channel checks also suggest ~ 5 mmscmd in September (Pre second wave: 7.5 mmscmd).
Exposure to Spot LNG has reduced to 10-15% of industrial volumes during September: Assuming (~ 2 mmscmd), total industrial volumes for GUJGA could be ~ 7 mmscmd in September. With the help of newer HPHT dom gas contracts, the exposure to pure Spot LNG could be reduced to ~ 15% of industrial volumes only at these levels of volumes.
Spot LNG has risen to abnormally high levels: Spot LNG has now risen to > $ 28/mmbtu (35% slope to Brent vs hist avg of ~ 13%). The key drivers include supply constraints, lower Europe gas stocks heading into Summer, higher European carbon prices further aiding coal to gas conversion and resilient demand from Asia too.
2QFY22E EBITDA margin could still be robust at ~ Rs 5/scm due to lower spot exposure: The sharp dip in volumes in September due to shut down and container freight issues keeping volumes soft otherwise, the overall exposure to Spot LNG during 2QFY22E for GUJGA could be low at <30% keeping EBITDA margin robust at ~ Rs 5/scm and EBITDA too could be healthy at 17% 2 yr CAGR despite a tough macro.
Morbi volumes could be capped at ~ 6 mmscmd in the near term: In order to keep Spot LNG exposure for GUJGA at ~ 25%, Morbi volumes could be capped at ~ 6 mmscmd such total overall I/C volumes (requiring LNG) is at ~ 8 mmscmd.
Cut FY22E EPS by ~ 28% on lower volumes and margins over 2HFY22E: While we have cut 2HFY22E industrial volumes (in line with acceptable Spot LNG exposure), we have also built in a lower 2HFY22E EBITDA margin of Rs 4/scm incorporating Spot LNG at $ 22/mmbtu and another Rs 5/scm price hike by GUJGA (would still be at par with propane and Morbi customers have also taken 10-12% hike in Sep).
We have kept FY23-24E EPS broadly unchanged: As Spot LNG is likely to normalise post Winter, margins could rebound (high base of industrial PNG prices created by GUJGA) while volume growth should also resume given underlying demand (temporarily hurt by high freight/gas costs).
Maintain ‘buy’ but near term earnings could be volatile: While the rise in Spot LNG could remain an overhang in the near term, we expect 2QFY22E to be strong given lower spot exposure (due to lower volumes). Although the 2HFY22E earnings outlook is clouded by higher Spot LNG leading to our 28% FY22E EPS downgrade, we think the high base of industrial prices would provide comfort on margins next year as Spot LNG likely normalizes post Winter from current extremely high levels even though <US$ 10/mmbtu Spot LNG looks tough given a tight market.