Q2FY24 Review: Petronet LNG: In-line results, but risky diversification?

31 Oct 2023 , 11:14 AM

Petronet LNG (PLNG) Q2FY24 PAT growth of 10% YoY was in line, with 16% YoY volume growth; outlook on regas business is improving given the moderation in LNG prices; TOP issues should be sorted out soon as per CFO, who also remains upbeat on Rs206bn investment in PDH-PP project (~20% IRR); analysts of IIFL Capital Services await more details on this non-core diversification which may enhance operating risk in long run. After the UPF in past 3 years, stock may find support at a dividend yield of 7-8% vs 6% now on FY25. 

In line Q2: 

PLNG’s Q2FY24 PAT at Rs8.2bn (up 10% YoY) was largely in line of the estimates. Aggregate volumes in Q2 were 16% up YoY and but down 3% QoQ, as expected; the Dahej / Kochi terminal utilisation was 93/20% respectively vs 80/15% YoY and 68%/20% QoQ. On an aggregate basis, the jump in volumes was mainly driven by Regas cargos (up 23% YoY). Share of LT/tolling/spot vols. in Q2FY24 was 52%/3%/45% vs 59%/1%/40% YoY. Efficient working capital management led the improvement in OCF to Ebitda conversion in 1HFY24 to 174% vs 60% YoY. 

Non-core business foray: 

During the earnings call, PLNG shared that – 1) its board has approved Rs210bn investment in setting up 750KTA of propane dehydrogenation, 500KTA polypropylene unit along with ethane storage tank; tentative CoD is sometime in FY28; land is acquired; it has singed binding term sheet with Deepak Phenolics for offtake of 250KTA Propylene and 11KTA of H2 for 15 years; project IRR is seen at 20%; soon, it plans to sign offtake agreement for ethane; 2) outlook on core regas business is improving with moderation in LNG prices; 3) expansion work on Dahej jetty and terminal should complete by FY25, and enhance throughput by ~25%; 4) Kochi terminal utilisation should also improve with pipeline connectivity; 5) it is confident to receive TOP charges pertaining to COVID period (Rs13bn), through bilateral negotiations. 

No near- term trigger: 

PLNG’s FY24-26 earnings will remain unaffected regardless of its investments in petrochemical project; its valuations are inexpensive at 8x FY25ii P/E and partly build in risks of such investments. Prima facie, analysts of IIFL Capital Services do not see the foray petrochemical project as a strategic fit, and await further details (a separate analyst meet is likely soon); until then the stock may find fundamental support at dividend yield of 7-8% on FY25ii vs 6% now; clearly, there is no trigger in sight.