Kotak Institutional Equities rule out material risks to utilization of Dahej terminal from competition given constraints or delays being faced by the new terminals. The recent correction in Petronet LNG stock offers an opportunity to BUY as it now trades near NPV of long-term contracts, even as volumes remain robust and well above contractual commitments. Kotak Institutional Equities expect strong earnings/FCF trajectory to translate into higher dividends, given limited investment avenues meeting Petronet LNG’s threshold IRR. Petronet LNG share price today closed at Rs 224, up Rs 3.3 or 1.5%.

COMMERCIAL BREAK
SCROLL TO CONTINUE READING

Limited risks to utilization of Dahej terminal amid constraints/delays faced by new terminals:

The recent weakness in Petronet LNG stock amid plausible concerns on utilization of Dahej terminal is overdone, in Kotak Institutional Equities view.

See Zee Business Live TV Streaming Below:

Kotak Institutional Equities rule out material risks from competition from new terminals noting:

(1)    Mundra operating at 35-40% utilization have limited capacity to offer, given constraints in evacuation network with the work on new Anjar-Chotila pipeline yet to commence
(2)    Dabhol remaining constrained amid lack of progress on breakwater construction
(3)    Jaigarh about to miss its delayed commissioning timeline yet again given non-arrival of its FSRU as suggested by industry journals
(4)    Jafrabad’s commissioning remains uncertain with completion delayed to March 2022 and its FSRU let out to Petronas for now.

In the medium term, Dahej utilization may hold up well given anticipated increase in LNG off-take from new fertilizer plants and higher gas demand post expansion in cross-country pipeline and CGD infrastructure.

Dahej has operated well above contracted levels with 100%+ utilization notwithstanding competition from existing and new terminals; the company has initiated plans to expand capacity to 20 mtpa in 3-4 years. Kochi’s utilization is all set to increase post the recent commissioning of pipeline to Mangalore and likely completion of pipeline to Bengaluru, now being backed by the Tamil Nadu government.

Robust earnings/FCF trajectory to translate into sustainable higher dividends payout:

Kotak Institutional Equities expect Petronet LNG to deliver a healthy 10% CAGR in EPS over the next five years driven by gradual ramp-up in volumes across both terminals and 5% annual escalation in tariffs for Dahej (no escalation for Kochi). This will result in significant FCF generation and sustainable higher dividends payout, as high internal threshold equity IRR of 16% with contractual commitments preclude large capex projects being undertaken by the company.