Petronet LNG rating: ‘Buy’; Q1FY21 results were modestly above estimates

Healthy earnings CAGR of 10-11% expected over the next 3-5 years; estimates fine-tuned; valuations are attractive; ‘Buy’ retained

A man looks out to sea as the DCI Dredge XV hopper dredger, operated by Dredging Corp. of India Ltd., travels past the Kochi LNG Terminal, operated by Petronet LNG Ltd., at Cochin port in Cochin, India, on Saturday, May 30, 2015. India is gearing up for a deficient monsoon for a second year, signaling record food imports, efforts to cushion farmers and contingencies for lower hydroelectricity. Photographer: Dhiraj Singh/Bloomberg

PLNG’s Q1FY21 results were modestly ahead of our estimates reflecting marginally higher-than-expected volumes amid a challenging environment. We retain our constructive stance seeking comfort from prudence on capital allocation, limited risks to volumes/tariffs/earnings and attractive valuations at 12X FY2022e EPS. We reiterate Buy with FV of Rs 300, expecting the company to deliver healthy 10-11% CAGR in earnings over the next 3-5 years driven by higher volumes and tariffs.

Q1FY21 results modestly above estimates with volumes moderating

PLNG’s Ebitda declined 11% y-o-y and 10% q-o-q to Rs 9.1 bn in Q1FY21, 3% above our estimate reflecting modestly higher-than-expected volumes and a sharper-than-anticipated reduction in operating expenses. Overall volumes were 2% above our estimate, declining 13% q-o-q and 16% y-o-y to 190 tn BTUs. Utilisation at Dahej terminal moderated to 81% from 103% in the previous quarter reflecting a reduction in demand due to the lockdown. LNG off-take from Dahej reduced to 181 tn BTUs in Q1FY21 from 206 tn BTUs in the previous quarter. Kochi terminal supplied 9 tn BTUs of LNG, with utilisation moderating to 14%.

Reduction in operating expenses reflected lower volumes as well as lower repair and maintenance expenses. Adjusted PBT, excluding Rs 680 mn of impact from lease accounting under Ind-AS 116, declined 14% y-o-y to Rs 7.6 bn and PBT, including Ind-AS 116 impact, declined 17% y-o-y to Rs 7 bn. Adjusted net income declined 7% y-o-y and 11% q-o-q to Rs 5.2 bn (EPS of Rs 3.5), 3% above our estimate, as lower interest and depreciation expense was offset by lower other income.

Dahej utilisation expected at ~100% in Q2FY21; Kochi-Mangalore pipeline likely by end-August

In the post-results conference call, PLNG management indicated—(i) utilisation at the Dahej terminal has increased to 104% currently and the management is confident of achieving ~100% utilisation for Q2FY21; Kochi utilisation has also increased to ~20%; (ii) Kochi-Mangalore pipeline is likely to be completed by the end of this month, following which utilisation at the Kochi terminal is anticipated to increase to 30-35%; (iii) there has been no material progress on the Tellurian MoU or Sri Lanka/ Bangladesh projects for now; (iv) PLNG initiated force majeure on nine LNG cargoes in Q1FY21; (v) PLNG is evaluating long-term LNG sourcing contracts; and (vi) capex is expected to be around Rs 3.5 bn for FY2021.

Fine-tune EPS estimates; reiterate BUY with unchanged Fair Value of Rs 300

We reduce our FY2021-23 EPS estimates modestly by ~2% factoring in (i) modestly lower volumes; (ii) higher regasification tariff for Kochi at Rs 83.1/mn BTU as the company escalated tariffs by 5% from Q1FY21; and (iii) other minor changes. We reiterate Buy with DCF-based FV of Rs 300 noting (i) healthy 10-11% CAGR in earnings over the next 3-5 years; (ii) reasonable valuation at 12X FY2022e EPS; and (iii) high FCF/dividend yield of 6-7% pending final decisions on large investment proposals, which may be unlikely to be approved soon given PLNG’s strategy of seeking long-term commitments along with 16% IRR threshold.

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