Lockdown blip covered by force majeure pacts; EPS for FY20-22e down 3-14%; TP revised to Rs 300.
Our reverse valuation for PLNG suggests the stock is trading at ~10% discount to NPV of long-term contracts, thereby pricing in materially lower off-take of volumes in the long run. PLNG’s volumes have remained well above contracted levels historically and are expected to increase further with commissioning of Kochi pipeline post lockdown and further expansion of Dahej. We reiterate Buy with a FV of Rs 300 (Rs 325 earlier), while reducing estimates to factor in the transient impact.
Reverse valuation implies sub-85% utilisation of Dahej and no improvement for Kochi. Our reverse DCF valuation exercise for PLNG suggests the stock is trading at 10% discount to NPV of Rs 210/share on the basis of its long-term contractual commitments; we have calculated NPV at a discount rate of 11%, assuming continuation of 5% annual escalation in tariffs. This implies that the stock is effectively pricing in an improbable scenario of (i) sub-85% utilisation for Dahej terminal at 17.5 mtpa capacity and (ii) no improvement in utilisation of Kochi terminal from current levels of ~15% on 5 mtpa capacity, in the long run. We highlight that PLNG has volume commitment of 17.2 mtpa across both terminals until FY2029, 12.2 mtpa during FY2030-34 and 9.7 mtpa in FY2035-37, including its back-to-back contracts with RasGas, Gorgon and tolling customers.
PLNG’s volumes have remained well above the contracted levels historically and it is expected to rise further with the imminent commissioning of Kochi pipeline, once the ongoing domestic lockdown gets over. Volumes at Dahej are also expected to increase in the medium term, once the company completes the 2-mtpa expansion project by FY2024.
Lockdown-driven blip to be safeguarded by force majeure covenants
Recent media articles suggest that the off-take of volumes from Dahej terminal has declined sharply due to the reduction in industrial activity across key LNG-consuming sectors post the domestic lockdown to contain Covid-19 outbreak. It is difficult to quantify the impact on volumes for now; however, it is safe to assume the off-take will gradually revert back to normalcy once the lockdown ends. PLNG has also initiated a force majeure clause to delay off-take of volumes from its suppliers under long-term contracts, which will safeguard it from any material liability.
We understand that long-term contracts have clauses which require intermittent reduction in volumes to be adjusted in future years by the suppliers as well as off-takers, thereby preventing any loss of value for the company.
Cut FY2020-22 EPS by 3-14%
We cut our EPS estimates to (i) Rs 16.8 (-6%) in FY2020, accounting for forex-related loss of around Rs 1.7 bn on lease liabilities under Ind-AS 116 provisions for Q4FY20 and marginally lower volumes, (ii) Rs 17.8 (-14%) in FY2021, reducing overall volumes to 17.2 mtpa from 18.2 mtpa in FY2020e, given the likely impact from the domestic lockdown in the near term and delays in ramp-up of Kochi and (iii) Rs 22.4 (-3%) in FY2022, factoring in modestly lower volumes. Our DCF-based FV reduces to Rs 300 from Rs 325 earlier. We expect the company to continue paying higher dividends, pending investment in proposed overseas projects.