J.P. Morgan - Petronet LNG Ltd. (PLNG IN)

Petronet LNG Ltd. (PLNG IN) Headline beat on more remunerative volume mix; volumes remain subdued		Overweight Price: Rs144.80 30 Apr 2014 Price Target: Rs175.00 PT End Date: 31 Mar 2015

Petronet LNG reported a 4Q profit of Rs1.69bn (up 25% q/q; down 31% y/y), above our and consensus estimates, with a more remunerative volume mix (despite lower volumes), and higher other income. The coming quarters are likely to remain challenging, with Kochi utilizations remaining low (c.5%) – however, the Dahej terminal should see incremental growth. We believe the near-term earnings pressure due to low utilizations at Kochi is largely discounted by the stock, and visibility over earnings growth (JPMe – c.26% CAGR over FY14-17) will drive stock performance.

Table 1: Petronet LNG earnings summary

INR mn

	4QFY13	1QFY14	2QFY14	3QFY14	4QFY14	Y/Y	Q/Q
Sales	84,408	83,770	94,489	93,101	104,085	23%	12%
Regas	248	672	446	720	193	-22%	-73%
Net Sales	84,656	84,442	94,935	93,821	104,278	23%	11%
Raw Material	79,986	79,593	90,316	89,171	99,344	24%	11%
Staff Cost	137	86	80	106	195	42%	85%
Other expenditure	190	785	900	1,045	871	358%	-17%
EBITDA	4,344	3,978	3,639	3,499	3,868	-11%	11%
Interest	247	240	386	783	786	218%	0%
Depreciation	468	467	597	1,017	1,000	114%	-2%
Other Income	203	152	161	216	308	52%	42%
PBT	3,831	3,423	2,818	1,916	2,389	-38%	25%
PAT	2,451	2,253	1,818	1,356	1,693	-31%	25%

Source: Company reports.

· Volumes subdued: Volumes during the quarter were subdued, falling 5% sequentially, as with lower throughput at Kochi, and a fall in tolling volumes, due to lower demand. Current low spot prices could spur demand, in the company’s view.

Figure 1: Quarterly Volumes

TBTU

Source: Company reports.

· Margins improve: With lower tolling volumes, PLNG was able to bring in a higher proportion of short-term supplies, improving realizations in the process (EBITDA/mmbtu at c.Rs33 in 4Q, vs. Rs28.3 in 3Q).

Figure 2: Quarterly EBITDA/unit

INR/mmbtu

Source: Company reports and J.P. Morgan estimates.

· Dahej volumes could see incremental growth: PLNG has commissioned the second jetty at Dahej, which potentially allows for incremental volume growth, due to higher load handling capabilities. The long-term contract with GSPC, allotting 1.25MMTA of capacity has also commenced. In addition, the company has tied up 0.8MMT of supplies in FY15, with agreements with buyers already reached. The company also expects GAIL to bring in c.1MMT this year – potentially leading volumes at Dahej over 10.5MMT in FY15.

· Kochi utilizations to remain low in FY15: The company expects utilization at Kochi to remain in the range of 5% in FY15, with the continuing lack of pipeline connectivity for the terminal.

· Project update: The 5MMTPA expansion at Dahej remains on track to be commissioned at the end of CY16 – the company has received an advance of Rs3bn from long-term offtakers towards booking capacity already (further Rs9bn is to be received).

· Stock direction: While we expect the next few quarters to be challenging, we believe this is largely discounted by the stock. PLNG is a key beneficiary of India’s structural leverage to LNG – we believe visibility of strong earnings growth will drive stock performance over the next 18-24 months.

Investment Thesis

PLNG is the primary play on increasing usage of LNG in India – where a large gap between demand and domestic supply will keep demand for LNG in place, in our view. While we believe the next few quarters will be challenging (given low Kochi utilization), the stock price reflects these concerns, in our view. Increasing volumes at Dahej would help drive earnings expansion in FY15-16. We view PLNG as well positioned for investors with a horizon of 18-24 months.

Valuation

Our Mar-15 PT of Rs175 is based on DCF, with a WACC of 11.7% and a terminal growth rate of 2%.

Risks to Rating and Price Target

Key downside risks include lower-than-expected regas margins and volumes, and execution delays.

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