Petronet LNG shares declined over 3% to hit a 52-week low of ₹195.15 apiece on the BSE on Tuesday. The fall comes after the stock cracked 8.5% in the previous session.
The company’s board approved to set up a petrochemicals project of 750 KTPA of PDH & 500 KTPA of PP plant including propane and ethane handling facility at Dahej at an estimated cost of ₹20,685 crore. The project will be commissioned after 4 years.
Analysts believe the capex plans in non-core petchem businesses will stress the company’s balance sheet and could be value-destructive. Petchem investment needs very high margins to meet management targets of profitability.
Project returns estimates in question
At these costs, the company’s management has stated that at a basic assumption of Propane Propylene margin of $200/t and $600/t margin of Propylene-Propane, the project can deliver an IRR of 20% and equity IRR of 30%.
The management also mentioned an expected EBITDA of ₹4,000 crore from the project at a steady state.
However, to achieve this EBITDA, ICICI Securities’ rough cut estimates suggest that the project needs to earn EBITDA/t of over $800, which seems like a tall ask, given that even for integrated players, such as Reliance Industries, EBITDA/t has languished at less than $300/t levels for the last 2-3 years.
Additionally, with significant capacity being added by BPCL and other players in India, ICICI Securities sees material challenges to achieving this level of margin for Petronet LNG.
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“We confess that we struggle to understand the basis for management assertion that this is a 20% IRR project – our assessment of rough cut numbers indicates a much lower return profile for the project, underpinning our reiteration of HOLD despite low valuations, recent underperformance, steady EPS growth and high dividend yields,” ICICI Securities said.
The brokerage cut the target price on the stock to ₹210 per share from ₹235 earlier.
Capital misallocation risk key negative
JM Financial believes capital misallocation risks continue given the management’s aggressive capex plans in non-core petchem businesses (and also on LNG fuel marketing business), which could be value-destructive as they are outside Petronet LNG’s core competence and as existing petchem companies are struggling to make reasonable returns.
The brokerage reiterated its ‘Hold’ rating and has cut target price to ₹210 per share from ₹235 earlier as it factors in capex to be higher at ₹4,000 crore p.a. from FY26 onward versus its estimate of ₹2,500 crore.
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No meaningful synergies
Kotak Institutional Equities said petchem business will have no meaningful synergies with existing LNG regas business, and Petronet LNG has no competitive advantage. It also noted that the Petronet LNG’s promoter companies, GAIL, ONGC, IOC and BPCL, have all struggled in petchem business in recent years.
In its initial view, petchem diversification will be a drag for the next few years.
“The estimated capex of ₹207 billion is 50-60% higher than initial guidance (before feasibility). PLNG has no significant competitive advantage nor any meaningful synergy with existing business. Large capex over the next 4-5 years will be a drag,” Kotak Institutional Equities said.
It reiterated ‘Sell’ rating and redacted the target price to ₹165 per share from ₹210 earlier.
Read L&T Q2 Results Live Updates here
Brokerage firm Prabhudas Lilladher notes the company has cash of ₹18.2 billion and bank balance of ₹60.1 billion, and has announced a capex of ₹206.9 billion on a PDH-PP petrochemical plant.
“We believe this will stress the company’s balance sheet, and likely reduce its ROCE. Owing to these reasons we change our rating from ‘Buy’ to ‘Hold’ with a TP of ₹208 based on 11x FY26 P/E,” it said.
Petronet LNG Q2 Results
The state-run oil and gas company on Monday reported a consolidated 4.4% QoQ rise in its Q2FY24 net profit at ₹855.74 crore. The company’s consolidated revenue from operations during the quarter increased 7.5% to ₹12,532.57 crore from ₹11,656.38 crore in the April-June quarter.
At the operational level, Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) during the quarter ended September 2023 rose 2.8% to ₹1,214.7 crore from ₹1,182 crore, while EBITDA margin compressed to 9.7% from 10.1%, QoQ.
Petronet LNG’s board also declared an interim dividend of ₹7 per equity share of the face value of ₹10 each for the Financial Year 2023-24.
At 2:15 pm, Petronet LNG shares were trading 0.92% lower at ₹199.85 apiece on the BSE.
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Updated: 31 Oct 2023, 02:16 PM IST