Petronet (PLNG) posted record-high quarterly volumes of 220tbtus (+16%/+15% yoy/qoq) in 2QFY18, despite India’s flat yoy LNG imports during the quarter on the back of strong demand from refineries, power and fertilizers. Higher long-term volumes (+30% yoy) along with an increase in regas margins pushed up EBITDA by 24% yoy to Rs 9bn, 12% above EE. While FY18 would be strong for PLNG, Dahej would face headwinds in next two years in the form of: (1) increased domestic gas production and (2) competition from Mundra LNG amidst muted growth in LNG demand. We see Dahej volumes peaking in FY18 but expect earnings growth to be relatively muted at 7% CAGR over FY18-FY20E. Downgrade to REDUCE (from ADD) with a Mar’19 DCF-based TP of Rs 250 (Sep’18 TP of Rs 218 earlier).
LNG demand at near-peak levels
: A spurt in merchant tariffs led to a significant demand uptick from power plants in September-October with LNG offtake in power increasing to ~12mmscmd from 11mmscmd (Exhibit 2). Apart from refineries, 2Q saw higher volume offtake for petchem with RIL starting its petcoke gasifier. In our view, LNG demand is hitting its near-term peak (unless the government announces a scheme for gas-based power plants) in the next 1-2 quarters, and this should reflect in flattish or lower LNG imports in the coming quarters.
High domestic production, rising competition to hurt long-term volumes
: A likely increase in ONGC’s domestic gas production would replace LNG in fertilizer sectors (most price taker in the segment) over the next two years. This would reduce LNG demand and leave off-takers with some unsold long-term volumes. Also, commissioning of the Mundra LNG terminal by Mar’18 should lead to some shift in volumes, restricting Dahej volume growth in FY19E.
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