Petronet LNG - Q3FY14 Result Update - Weak Core Earnings, Lower Taxes Pep-up PAT : Centrum

Rating: Hold; Target Price: Rs120; CMP: Rs110; Upside: 9.1%



Weak Core Earnings, Lower Taxes Pep-up PAT



We maintain Hold rating on the stock with a revised PT of Rs120. We
believe, over the next 2 years, the earnings will continue to face
multiple headwinds leading to weak outlook as it stares at a scenario
of (1) high LNG prices, competition and weak demand leading to subdued
capacity utilisation; (2) inordinate delay in pipeline commissioning
at Kochi leading to increase in under-recovery of fixed costs and (3)
lack of pricing power to charge trading/marketing margins as in
FY12/FY13. During the quarter, core earnings reflected weakness
despite higher throughput of spot/tolling volumes as trading/marketing
margins slumped.

$ Earnings snapshot and outlook: EBITDA at Rs 3.5bn (-32% YoY and -4%
QoQ) and RPAT at Rs1.4 bn (-57% YoY and -25% QoQ) were under pressure
on account of (1) decline in trading/marketing margins at Rs21 mn
(-98% YoY and-79% QoQ) and (2) under-recovery of costs at Kochi of Rs1
bn.  Owing to shift to MAT regime, tax rates were lower at 29% which
aided PAT. We believe the company's earnings will remain under
pressure over the next 2 years owing to (1) steep decline in
trading/marketing margins; (2) under-recovery of fixed costs at Kochi
at Rs 2.9bn/Rs 3.9bn in FY14E/FY15E; (3) weak demand for RLNG marring
operating leverage and (4) capex cycle of Rs76bn subsumed would start
to deliver earnings from FY16E/FY17E and hence leading to a decline in
core RoE to 16%/18% in FY15E/FY16E vs. 33% in FY13.

$ Project updates: The capex for Dahej expansion by 5 MMTPA has been
reduced by Rs8bn to Rs24bn and the project is guided to be
commissioned in Nov-16. Pending approvals from Gangavaram port, we
expect the company to shelve plans to float an FSRU terminal at
Gangavaram and instead focus on a land based RLNG terminal. The second
jetty is on track and will be commissioned in Apr-14. In addition, the
company plans to set up a 40 MW wind plant for a capex of Rs2.5bn over
the next 12-15 months.

$ Outlook on off-take: In Q3FY14, PLNG signed off-take agreements of
2.5 MMTPA with BPCL and IOCL. With this, PLNG provides firm off-take
arrangement with take-or-pay clause of 14.75MMTPA for Dahej expansion
scheduled for Nov-16. Until then, Dahej terminal offers firm
visibility of 9.8MMTPA (term+spot+tolling). As indicated by us in
Q2FY14 update, management confirmed that competition from Shell Hazira
and Dabhol terminals was on the rise. With stagnant demand at high
RLNG prices, we expect the company to charge benign trading/marketing
margins.

$ Valuations and key risks: We valued the company as average of our PT
derived on (1) DCFF and (2) PEx assigned to Dec-15E EPS. Accordingly,
we arrived at our price target of Rs 120 (Rs110 earlier). At our
implied PT, Petronet LNG would trade at a P/Bx and P/Ex of 1.6x and
11.7x FY15E respectively. Our PT continues to be contrarian and below
street consensus of BUY rating and a Bloomberg consensus price target
of Rs145. Key risks to our rating are (1) higher capacity utilization;
and (2) higher trading/marketing margins.



Thanks & Regards

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