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.

Source : Equity Bulls

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