Company update: Petronet LNG (Outperformer) - In good shape
We present key takeaways from our meet with Petronet LNG (PLNG). Management:
Competition is not a worry, so far: Despite looming threat from competition, with LNG terminals on the west coast (Swan, Adani-GSPC), PLNG remains sanguine about its volumes/utilization, at least to the extent of 15.75mt of current contracts at Dahej and 1.5mt at Kochi. Management has acknowledged limited clarity on offtake of incremental capacity at Dahej (expansion to 17.5mtpa) nameplate capacity by 2QFY20E), but with strong growth in LNG demand over last 6 months, company is confident of placing this incremental capacity in the market, given its lowest cost advantage and competitive tariffs.
Capital allocation - Bangladesh seeing delays, Sri Lanka too marginal to matter: The onset of elections in Bangladesh coupled with limited clarity on government guarantee on offtake (a precondition set by PLNG to invest in the US$1bn project) has delayed the progress in Bangladesh, while balance sheet-wise, the share of project cost in Sri Lanka (47% of US$300m) is too small to matter for PLNG. The company is yet to take a decision on increasing dividend; Q2FY19 results may bring some clarity in this regard.
Kochi – Mangalore pipeline on track to be completed by Q4FY19: While there are some delays expected in the completion of Kochi-Mangalore pipeline (earlier estimate Dec 2018), PLNG still expects the availability of this pipeline from Q1FY20 onwards. This would imply the movement of 0.8mt of Gorgon volumes currently being received at Dahej to Kochi – freeing up some spot volume capacity at Dahej.
Tariffs can moderate: We believe a pick-up in utilization could moderate Kochi’s tariff of >US$1/mmbtu, causing PLNG’s overall margins/unit to moderate too over FY20-21E, even as absolute profitability improves.
Valuations remain attractive, Reiterate Outperformer: We note every 0.5mt reduction in volume could impact EPS by Rs0.6/sh but we believe our estimate of 16.1mt/16.5mt from Dahej for FY19E/20E are not at material risk, given the strength in LNG demand and the nascent stage of offtake contracts of the new terminals. With additional Kochi volumes expected in FY20E, we estimate double-digit EPS growth over FY19-21E. At 14x FY20E PE/9x EV/E, the stock offers attractive upside.
Petronet LNG develops, designs, constructs, owns and operates Liquefied Natural Gas (LNG) import and regasification terminals in India. Co. operates through the natural gas business segment. Co.'s terminals include Dahej LNG terminal, Kochi LNG terminal and Solid cargo port. Co. owns and operates a LNG regasification terminal with name plate capacity of 10 MMTPA at Dahej, in the State of Gujarat. Co. also has commissioned another LNG terminal with name plate capacity of 5 MMTPA at Kochi, in the State of Kerala. Solid Cargo Port Terminal has facilities to import/export bulk products, such as coal, steel and fertilizer.
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