Petronet LNG (PLNG) reported subdued Q4FY18 performance with Ebitda at Rs 8.2 bn (up 16% y-o-y, down 3% q-o-q; 7% below estimate) on lower than estimated volumes. Volumes, at 4.1MMT, missed by 5% on lower utilisation at both Dahej and Kochi terminals (106/9% versus estimated 111/14%). Dahej volumes came 4% below on lower term volumes though offset to an extent by higher spot sales. We envisage robust near-term volume prospects as Kochi utilisation improves and Dahej terminal expands capacity by 8%.
However, we expect long-term headwinds amidst: (i) revival in inexpensive domestic gas production; (ii) rising competitive intensity in LNG re-gasification; and (iii) gradual LNG demand displacement following commissioning of RIL’s petcoke gasification project. We revise our DCF-based TP Rs 220 (Rs 248 earlier) factoring in higher risk-free rate at 7.8% (versus 7.6% earlier). Maintain Hold as we believe risk-reward is currently unfavourable.
Dahej slows; Kochi utilisation disappoints: Dahej volumes came at 3.98 MMT (up 17% y-o-y) with spurt in third-party volumes (up 22% y-o-y, in-line), though offset by lower term volumes (8% below). Kochi terminal’s utilisation further dipped to 9% (12% in Q3FY18) due to seasonal shutdown at FACT. Commissioning of Kochi pipeline by Dec, 2018 will revive Kochi volumes.
Key threats: domestic ramp-up and rising competitive intensity — Following years of lull, ONGC is reviving gas output (so far in CY18 output has revived ~8%). We believe domestic gas will displace expensive LNG given structural revival in gas output; Rs 800 bn projects and RIL-BP’s Rs 400 bn planned investment will cumulatively boost domestic production by ~60mmscmd over 2022. Moreover, rising competition from new LNG terminals remains a key concern. However, 90% of expanded Dahej capacity (17.5MMT from Q1FY20) tied up with off-takers, reduces the risk of competition.
Outlook and valuations: expensive
We forecast 14% EPS CAGR over FY18-20. At CMP, the stock trades expensive at 2.5x FY20e P/BV with RoE of 23%. We maintain ‘HOLD/SP’ with a revised target price Rs 220 (Rs 248 earlier), factoring in higher risk-free rate at 7.8% (7.6% earlier).