Petronet LNG Rating: Buy- A robust showing by the company

PLNG delivered a strong performance in Q2FY21 driven by a quick rebound in volumes and higher blended gross margins partly due to adventitious gains; higher dividend payout was comforting. The mgmt assuaged concerns on its non-binding MoU with Tellurian, while indicating that availability of several low-priced long-term LNG contracts now obviates the need for equity investment to lock in volumes. We reiterate Buy with FV of Rs 300.

Higher-than-anticipated recovery in volumes and higher blended margins
Ebitda increased 17% y-o-y and 50% q-o-q to Rs 13.6 bn in Q2FY21, 18% above our estimate, reflecting (i) 2% y-o-y and 34% q-o-q increase in volumes to 254 tn BTUs; and (ii) a sharp jump in blended gross margins, which included Rs 700 mn of adventitious gains and higher trading margins led by recovery in spot LNG prices. Adjusted net income increased 18% y-o-y and 78% q-o-q to Rs 9.3 bn (EPS of Rs 6.2), 30% above our estimate, further boosted by a sharp jump in other income.

Utilisation at Dahej terminal increased to a robust 109% from 81% in Q1FY21 reflecting a strong rebound in LNG demand, partly aided by lower cost of long-term as well as spot LNG in the quarter.

Healthy performance in H1FY21 despite lower volumes
In H1FY21, Ebitda increased 4% y-o-y to Rs 22.7 bn as 7% decline in volumes due to lockdown in Q1FY21 was offset by higher blended gross margins and lower operating costs. Adjusted net income increased 8% to Rs 14.5 bn (EPS of Rs 9.7) boosted by higher other income and lower interest cost. PLNG increased its special dividend to Rs 8/share now from Rs 5.5 declared in the previous year, raising payout to 83% of H1FY21 EPS.

Surplus LNG availability obviates the need for equity investment
The company indicated that there has been no progress on discussions pertaining to non-binding MoU with Tellurian, which is due to expire next month—several low-priced long-term sourcing contracts are readily available in the current oversupplied global LNG market and hence, PLNG may not be required to pursue any equity investments to lock in LNG volumes. The mgmt remained optimistic on its efforts to procure long-term LNG linked to JKM spot LNG prices.

Raise FY2021e EPS by 7%; reiterate BUY
We raise our FY2021e EPS by 7% factoring in (i) modestly higher volumes; (ii) higher spot LNG margins; and (iii) other minor changes. We reiterate Buy rating noting (i) healthy 10-11% CAGR in EPS over the next 3-5 years; (ii) attractive valuation at 11X FY2022e EPS; and (iii) high FCF/dividend yield of 6-7% pending final decisions on large investment proposals, which may take time to fructify.