Petronet LNG - Q1FY14 result update - Centrum

Lower trading/marketing margin drags earnings
Petronet LNG’s results for Q1FY14 were below our and street expectations
primarily due to sharp decline in trading/marketing margins which dragged
earnings. Capacity utilization was healthy at 102% vs. 96% in Q4FY13 and 100%
in Q1FY13. We believe that owing to weak demand for RLNG, the company had
focussed on higher capacity utilization (CU) and charged significantly lower
trading/marketing margin to enable higher off-take, which is in contrast to its
historical earnings model. We have downgraded the stock to HOLD with a
revised PT of Rs 124 primarily to factor in pressure on core earnings and lower
trading/marketing margins.
Earnings snapshot: Higher capacity utilization (CU) at 102% (+200 bps YoY and +600
bps QoQ) and higher unit sale price at Rs754 (+25% YoY and +6% QoQ) led to increase
in net sales to Rs 83.8 bn (+20% YoY and -1% QoQ). EBITDA at Rs 3.9bn (-13% YoY and -
8% QoQ) and RPAT at Rs2.3 bn (-17% YoY and -8% QoQ) was under pressure on
account of in (1) decline in trading/marketing margins at Rs 0.09 bn (-87% QoQ and
-89% YoY) and (2) increase in internal consumption of RLNG.
Trading and marketing margins: During Q1FY14, we believe PLNG earned
~Rs0.09bn (USD0.04/MMBTU) as net trading/ marketing margins, down 87% QoQ and
up 89% YoY. We remain conservative and have factored average marketing/trading
margins of USD0.2/MMBTU, although the management remains confident of pick-up
in trading /marketing margins to USD0.3/MMBTU. We believe that since RLNG price is
outside the regulatory purview, any attempt to regulate marketing/trading margins
for PLNG/GAIL and regas charges for PLNG would be challenging and hence do not
see any regulatory risk.

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Project updates: Kochi terminal is likely to be commissioned in Aug-13, however lack
of pipeline connectivity would keep CU lower. Award of tender work for Dahej
expansion by 5 MMTPA would be completed by Sep-13 and the company has an offtake agreement in place. Progress is slow at Gangavaram terminal as key clearances
are yet to be received and as visibility on demand /off-take arrangement is low, we
believe the terminal would not operate on FSRU and would be commissioned in
FY17E.
Kochi terminal: fixed cost under-recovery until FY15E to hurt earnings: We believe
company would report under-recovery of fixed cost of Rs 3.6bn/Rs3.9 bn in
FY14E/FY15E, as capacity utilization would be low. We estimate a throughput of
~0.4MMTPA/0.8MMTPA in FY14E/15E and factor-in a levy Rs62/MMBTU as regas
charges for its Kochi terminal in FY14E and 5% escalation thereafter.
Outlook: We believe Petronet LNG’s earnings will remain under pressure over the next
2 years owing to (1) lower trading/marketing margins; (2) under-recovery of fixed costs
leading to losses at Kochi terminal, estimated at Rs3.6bn /Rs 3.9bn in FY14E/FY15E; (3)
weak demand for RLNG to mar operating leverage and (4) capex cycle of Rs 105 bn
subsumed would deliver earnings from FY16E and hence we see core RoE declining to
21% /24% in FY14E/FY15E vs. 33% in FY13.
Valuations: We valued the company as average of price target derived on (1) DCFF
and (2) PEx assigned to FY15E EPS. Accordingly, we arrive at our price target of Rs 124.
At our PT, Petronet LNG would trade at a P/Bx and P/Ex of 1.7x and 10.6x FY15E
respectively. Historically, Petronet LNG has traded at an average one year forward P/Bx
and P/Ex of 2.4x and 9.9x respectively. We believe the subdued earnings cycle
envisaged would lead to de-rating in the stock and hence we have downgraded the
stock to HOLD with a revised price target of Rs 124.