Petronet LNG (PLNG) reported stellar Q1FY17 show with PAT of Rs 3.8 bn (up 55%q-o-q, 120% y-o-y) 40% ahead of our estimates. Earnings beat was driven by: (i) higher Dahej volumes (up 11% q-o-q), driven by strong third-party sales (surged 89% q-o-q); and (ii) robust trading margin at $0.7/mmbtu (versus estimated loss of $0.2/mmbtu). Consequently,
Dahej terminal utilisation hit a
7-year high at 116%, despite the sequential 4% decline in long-term (RasGas) volumes. Management expects strong utilisation levels even after brown-field expansion at Dahej by Oct ’16, as the company has already signed long-term use-or-pay contracts with end consumers. Over next five years, we factor in robust volume CAGR of 13% and EPS CAGR of 23%. We have raised our DCF-based target price to Rs 330 (Rs 271 earlier). Maintain hold.
Third-party volumes surged; strong trading gains
Dahej volumes rose 11% q-o-q, 32% y-o-y and capacity utilisation improved to 116% (versus. 104% in Q4FY16, 88% in Q1FY16). Higher off-take can be attributed to robust LNG demand (favourable price), while seasonal shutdown at Dabhol terminal shifted volumes to Dahej. Third-party volumes surged 89% q-o-q, while term volumes fell 4% and spot volumes fell 21% q-o-q. Kochi utilisation dipped to 5% from 8% in Q4. Trading gain of Rs 592m (estimated loss: Rs 246m) was driven by an improvement in spot LNG price.
Strong demand for term-LNG even if oil price recovers
With RasGas renegotiation, term-LNG prices have nearly halved (now at $5.5/mmbtu), improving its competitiveness, and reviving demand from end-consumers. Although earnings are now counter-cyclical to oil as the new formula quickly reflects oil price movement, there is limited risk in near term (if oil recovers to $60/bbl) as LNG consumption in India is driven by replacement demand from liquid fuels.
Outlook and valuations: Expensive; maintain hold
We expect strong growth in near-term volumes on expanded Dahej capacity which are largely secured through use-or-pay contracts. We forecast robust 38%/35% EPS growth in FY17/18 (volume growth of 14%/22%). However, we believe the stock trades expensive at 3x FY18e P/BV with RoE of 21%, largely pricing in the upside. Maintain ‘HOLD/SP’, with a DCF-based target price of Rs 330.
Dahej terminal volume CAGR of 12% over FY16-20e
In near term, we believe PLNG will benefit from its planned capacity expansion at Dahej (from 10 MMT to 15 MMT in 2016 and to further 17.5 MMT in 2019) and infrastructure debottlenecking at Kochi. As the company has already inked long-term contracts for 90% of its overall Dahej capacity, there is indeed some level of protection against unfavourable LNG price movement.
Q1FY17 conference call:
Volumes benefitted from Dabhol shutdown: Q1 benefitted from shutdown at Dabhol which will recommence in October. Share of long term and third party cargoes will increase going forward.
Dahej expansion status: It is nearing completion. PLNG commissioned its vapouriser in August. Two storage tanks will be commissioned in October, before schedule. Full capacity will be available from FY18. Total investment has been Rs 20 bn and incremental depreciation will be Rs 1 bn on expanded capacity.
Opportunities in Sri Lanka and Bangladesh: There is strong demand for gas in both regions. Internal assessment of the projects is under way, with final decision likely in a year.
Kochi-Mangalore pipeline: Consists of 5 spreads; contract for one spread has been awarded by GAIL. Management expects at least two years for pipeline to commence.
Gorgon volumes: To commence from January’17. Initial volumes will come to Dahej and later to Kochi.
Gross debt: Pegged at Rs 23 bn, advances from vendors and off-takers — Rs 14 bn.
Power pooling volume: Demand of 10 mmscmd (current: 5 + additional: 5) in next 6 months from Oct’16. Current power pooling scheme will end in March’17. Management believes power demand will continue without the scheme at current price.
Competition: Shell will be impacted the most following RIL reducing its LNG usage. Upcoming capacities are yet to have firm off-take commitments.
Investment in ships: The board has approved investment of $12 million (Rs 0.8 bn) in one LNG ship charter-hired by PLNG for Gorgon volumes to Kochi/Dahej. The ship, to be delivered in November, will only ply for PLNG.