Petronet LNG - Lower trading/marketing margin drags earnings - Centrum

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.

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.

Source : Equity Bulls

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