Petronet LNG Ltd.- Q3FY14 Update-CMP Rs.115, Rating Changed to Accumulate, Target Revised to Rs.138 - Sushil Finance

PETRONET LNG LTD. (PLL) - Q3FY14 RESULT UPDATE - CMP Rs.115, Rating Changed to Accumulate, Target Revised to Rs.138

Petronet LNG Ltd. (PLL) has reported slightly disappointing set of numbers for the quarter ended Dec'13 wherein PAT de-grew by ~57% YoY to Rs.1356 mn. We attended the conference call of the company and following are the key highlights of the results which are summarized below:

Key Highlights of Q3 & 9MFY14 results

- Declining volumes coupled with capitalization of Kochi terminal in Q2 led to sharp drop in net profits which declined by ~57% YoY & 25% QoQ to Rs.1356 mn. Volumes disappointed on back of sluggish demand due to higher LNG prices coupled with some diversion of volume to Shell & Dabhol terminals. Volumes stood at 124 tbtu's down ~12% YoY & flat sequentially on back of lower spot volumes (down ~55% YoY) while 9MFY14 volumes were down by ~6% to 376 tbtu's. Dahej utilization was lower @ 95%. Mgmt expects flattish volumes sequentially while some revival expected from Q1FY15 with commissioning of jetty in April'14. Marketing margins were flat QoQ at ~$0.13-0.14/mmbtu.

- Capitalization of Kochi terminal in Sept'13 had a strong impact on profitability with depreciation & interest increasing to ~Rs.1800 mn v/s Rs.760 mn YoY. Under-utilization of Kochi terminal has led to PBT loss of ~Rs.1 bn in Q3. Kochi volumes in Q3 stood very low at 3.4 tbtu's (~5% utilization) with connectivity still remaining a major issue. Mgmt has not defined any timeline for pipeline connectivity. Utilizations will remain low (~5-8%) till connectivity issues get resolved. Price escalation of 5% has been taken at both terminals from Jan'14 with Kochi Re-Gas charges at Rs.65/mmbtu.

- Apart from tolling arrangements with Gail (2.5 MT) & GSPC (2.25 MT), the Company has also entered into long-term agreement with BPCL (1 MT) & IOC (1.5 MT), thus booking ~7MT capacity at Dahej. Capacity expansion of 5MT at Dahej is likely to get completed by Nov'16 with overall capex of ~Rs.24 bn of which ~Rs.12 bn will be received as interest-free advance from capacity holders (Advance to be adjusted against Re-Gas Charges over 15 years). Re-Gas Charges for these capacities to be in-line with current Re-Gas charges with in-built escalation clause. Thus ~14-15 MT (7.5 MT Ras Gas & 7 MT Others) would be booked under long-term arrangements.

- Considering the demand slowdown at higher LNG prices, lack of visibility on connectivity issues coupled with prolonged under-utilization of Kochi terminal, we have downward revised our earnings estimate for FY14E & FY15E by 7% & 6% to Rs.8.9 & Rs.9.7 respectively.

OUTLOOK & VALUATION

Lower spot volumes, under-utilization of Kochi terminal coupled with lower marketing margins has led to slightly disappointing set of numbers for the current quarter. Connectivity at Kochi along with sluggish demand at Dahej remains the major concern in the near term offering limited room for upside from current levels. However, we remain positive on the growth prospects of the Company taking into account its leadership position, strong execution track record & the dynamics of the industry in which it is operating. Considering the above overhang, we expect stock to underperform in near term & hence recommend 'Accumulate' with a revised price target of Rs.138.

Source : Equity Bulls

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