Maintain ADD on Petronet LNG - One offs in opex drag profitability - HDFC Securities

Mr. Harshad Katkar & Mr. Nilesh Ghuge, Institutional Research Analyst, HDFC Securities.

Petronet LNG (Q4FY20): One offs in opex drag profitability. Maintain ADD
(TP Rs 280, CMP Rs 258, MCap Rs 387bn)

Our ADD recommendation on PLNG with a TP of INR 280 is premised on a robust volumes offtake in 2HFY21 and FY22E as (1) Benign LNG prices will ensure high LNG imports, in turn allowing full utilisation at Dahej on its expanded capacity, and (2) Completion of Kochi-Mangalore pipeline by Jul-20, which will subsequently raise utilisation at Kochi.

View on the result: Volumes were in-line with estimates. However, EBITDA missed estimates by 25% owing to 2.7x higher opex.

Standalone financial performance: 4Q EBITDA came to INR 7bn, +11/-37% YoY/QoQ, largely on account of 2.2/2.8x YoY/QoQ spike in opex to INR 4bn. Reason for higher opex, (1) Impact of Ind AS 116 on Leases, INR 2,380mn broken down as INR 1,680/70mn on forex and lease liabilities (2) Donation of INR 1bn to PM Cares fund. EBITDA for FY20 stood at INR 40bn (+21% YoY). Opex of INR 8bn for FY20 include INR5bn on account of Ind AS 116. Back calculated marketing margin for 4Q was INR 430mn (est. INR 662mn).

Terminal-wise performance: Utilisation at Dahej/Kochi stood at 92/20% in 4QFY20 vs 103/11% in Q4FY19 and 100/17% in Q3FY20. Services volumes at Dahej dipped 5% QoQ to 2.1mmt (105tbtu). Although spot volumes were low (3% of Dahej vols), we suspect these will rise with (1) Spare capacity availability after Kochi terminals' volumes are shifted back, and (2) Persistently low LNG prices. We expect its gradual ramp-up post commissioning of the Kochi-Mangalore pipeline in Jul-20.

Outlook for FY21/22: We expect volumes to decline by 9% YoY to 16.5mmt (843tbtu) in FY21 (vs. 18.2mmt in FY20) as Covid-19 has adversely impacted demand and in turn industrial production. In FY22, vol should jump by 26% YoY to 20.8mmt (1,060tbtu). Accordingly, EBITDA for FY21 should remain muted at INR 40bn (+1% YoY) and thereafter grow by 29% YoY to INR 52bn.

View on the balance sheet: PLNG reduced its LT borrowings effectively to zero and increase cash reserves by 22% YoY to INR 46bn. Resultantly, RoIC spiked to 26% in FY22 from 20% in FY20. Debtors increased 16% while creditors and inventory declined by 10/16% respectively, leading to 2.5% YoY decline in overall working capital. Thus, cash conversion days reduced to nil in FY20 from 9 days in FY19.

Change in estimates: We cut our FY22 EBITDA est. by 8% to INR 51.7bn on account of reduction in Kochi terminal re-gasification charges and lowering market margins assumption.

DCF based valuation: Our TP is INR 280 based on Sep-21E cash flows (WACC 10%, Terminal growth rate 3.0%). The stock is trading at 12.0x FY22 EPS.

Shares of PETRONET LNG LTD. was last trading in BSE at Rs.257.65 as compared to the previous close of Rs. 258.1. The total number of shares traded during the day was 146681 in over 3034 trades.

The stock hit an intraday high of Rs. 260.8 and intraday low of 252.5. The net turnover during the day was Rs. 37686644.

Source : Equity Bulls

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