• Net sales at Rs102bn was in lower than our estimates; represented a growth of 20.3% yoy but a decline of 2.6% qoq

• Total volumes were at 138.6 TBTUs as compared to 129.5 TBTUs in Q1 FY14 and 117.3 TBTUs in Q4 FY14, mix however changed substantially with tolling volumes jumping from 4.5TBTUs in Q4 FY14 to 24.8 TBTUs in Q1 FY15

• OPM at 3.5% was in line with our expectations

• PAT at Rs1.6bn was in line with estimates as lower than expected depreciation was offset by higher tax rate

• Kochi ramp up continues to be a concern given the fact that there is no clarity on commencement of Mangalore and Bangalore pipelines, the company has secured a board approval to rent out Kochi terminal storage facilities for reloading for international players

• We downgrade our rating to Sell as we believe the recent rally in the stock adequately factors in the volume upsides from Dahej terminal

Net sales lower than expectations

Petronet LNG for Q1 FY15 reported revenue of Rs102bn lower than our estimates. Revenues grew by 20.3% yoy but declined 2.6% qoq. Yoy growth was driven by 1) higher LNG prices, 2) steep rupee depreciation, 3) 2.3% yoy increase in sales volumes and 4) 36% yoy jump in regas volumes. Long term volumes for the quarter were at 96.4 TBTUs, while sport cargos were at 17.4 TBTUs and regas volumes were at 24.8 TBTUs. Plant utilization at Dahej Terminal was at 109% in Q1 FY15 while Kochi terminal utilization was at 1% as it only supplies to Kochi refinery currently.

OPM in line with expectations

During Q1 FY15, OPM for Petronet LNG was at 3.5% much in line with our expectations. This represented a fall of 119bps yoy but a decline of 19bps qoq.. Operating profit was lower by 10.1% yoy and 7.5% sequentially. Gross margins were lower by 120bps yoy and 19bps qoq as the company being just a converter of LNG to RLNG passed through the increase in international LNG prices. Other expenditure as a percentage of sales were lower by 3bps yoy. With higher contribution of tolling volumes especially from GSPC contract, trading/marketing margins by the company were lower having the impact on overall profitability.

PAT in line with estimates

The company reported a PAT of Rs1.6bn which was in line with our expectations. Net profit was down 30.5% yoy. Depreciation was lower than expected which was on account of the provisions implemented from the Companies Act 2013 wherein depreciation for the quarter was lower by Rs295mn. This was offset by higher than expected tax rate at 34.1%. Interest expenses witnessed a three-fold jump on account of higher debt for Kochi terminal. Other income was higher by 131.8% yoy.

Key takeaways from the conference call

• During the quarter, Kochi terminal reported an EBIDTA loss of Rs150mn. At current volumes the terminal would report an annual loss of Rs5bn.

• Seond Jetty at Dahej terminal commissioned operations April 18, which will increase the handling capacity to 18mtpa of the terminal compared to 10mtpa currently.

• The company has started long-term tolling contract of 1.25mtpa with GSPC post the commencement of second jetty.

• The expansion of Dahej terminal to 15 mtpa is on track to commence operations by November 2016 at a total cost of Rs24 bn.

• To improve the utilization of Kochi terminal assets, the company has secured a board approval to rent out storage tanks to international players which will enable the company to earn 1) unloading charge, 2) storage charge and 3) reloading charge. The company is hopeful of earning some revenues during Q2 FY15.

• Following the approval from the state government, the Gangavaram project has almost all approvals. Once the orders for EPC are awarded it would take 36 months for mechanical completion. While the company is in favor of having a land based terminal, it has not yet ruled out a possibility of a FSRU.

Valuations expensive, downgrade to Sell

We downgrade our rating on the stock to Sell following at 57% rally in the past six months. During this period fundamentals have deteriorated with regards to scale up of the Kochi terminal with both pipelines (Mangalore and Bangalore) facing incremental hurdles. While utilization of Dahej terminal is expected to rise in FY15, it is more or less factored into the stock.