Petronet LNG's (PLNG) Q4 and FY21 consolidated EPS was up 71-27% YoY, driven by jump in Dahej regas charge. Dahej utilisation was the lowest in three quarters at 93% in Q4 (97% in FY21) hit by spot LNG surge in Jan'21. We have cut FY22E Dahej and Kochi utilisation to factor the impact from covid, high spot LNG price and rise in domestic gas output. We are assuming flat Kochi regas charge in FY22E; offtakers want it to be cut by 35% to same level as Dahej. These changes have led to a cut in FY22E EPS by 12% and target price by 15% to Rs213 (7% downside). Surge in capex (Rs187bn in next five years) and Dahej utilisation being capped by rise in domestic gas output and LNG import capacity in Gujarat are the other concerns. We, therefore, downgrade PLNG to REDUCE from Hold.

Q4 EPS up 71%: Q4FY21 standalone EPS was up 74% YoY driven by 16% YoY jump in Dahej regas charge and 21% YoY fall in interest cost. Dahej volumes were down 1% YoY and 8% QoQ and at the lowest level in three quarters (eight quarter low if covid-hit Q1FY21 excluded) in Q4. Kochi volumes were up 8% YoY and QoQ. Q4 consolidated EPS was up 71% YoY with profit share of investee up just 3% to Rs146mn. FY21 standalone and consolidated EPS is up 27% YoY as rise in regas charge more than made up for volume fall.

Earnings call takeaways: 1) Capex could be as high as Rs187bn in the next five years; Rs67bn is guided on expanding capacity, adding jetty and tanks at Dahej and Kochi, and on new East coast terminal, Rs80bn on 1,000 LNG stations and Rs40bn on compressed biogas; 2) capex is guided at Rs5.3-10bn in FY22-FY23E and Rs30- 40bn pa thereafter; 3) offtakers want Kochi regas charge to be cut to Rs54/mmbtu (same as in Dahej) but PLNG in unwilling to go below Rs83.1/mmbtu; 3) Dahej utilisation was hit in Apr-May'21 by covid second wave and high spot LNG prices but is up to 88% now; 4) Dahej utilisation is guided at 90-95% and that of Kochi at 25-30% in FY22E.

Dahej utilisation cut to 92-91% in FY22-FY23E: Rise in domestic gas output by 25-45mmscmd by end-FY22-FY24E (already up 18mmscmd) and LNG import capacity by 12mmtpa in Gujarat in FY23E is likely to hit Dahej utilisation. Three players, who have booked capacity on Dahej, have also booked 4.5mmtpa on Swan terminal, which is likely to be commissioned in CY22E despite May'21 cyclone Tauktae causing some damage. LNG imports by these players at Dahej were 0.8-0.5mmt higher than booked capacity in FY20-FY21. Once Swan starts, imports at Dahej are therefore likely to fall. We estimate Dahej volume fall to 16.1-15.75mmt, implying 92-90% utilisation in FY22-FY24E.

Cut FY22E EPS & target price by 12-15%: Dahej and Kochi utilisation cut to 92-25% vs 100-27% earlier, cut in other income by 32% (up 12% YoY) and assuming YoY flat Kochi regas charge (vs up 5% earlier) has led to cut in FY22E EPS by 12% and target price by 15% to Rs213. Kochi regas charge cut to same level as Dahej would mean 5% downside to FY22-FY23E EPS and 2% to FV to Rs209.