• Volume led growth to continue: Over FY10-13E, GSPL will grow
volumes at a 11%CAGR, driving a 13% CAGR increase in CEPS. We
see little risk of a downward revision in GSPL tariffs by the PNGRB,
based on preliminary tariff approved for GAIL's HVJ expansion. We
retain our positive view on the stock based on robust capital efficiency,
value of investments in CGD.
• Tariff ruling will be a key catalyst: GSPL’s tariff will be reviewed by
the PNGRB and a preliminary tariff is likely to be announced by end
2010. On conservative assumptions regarding operating expenses and
applicable capex for tariff determination, we believe GSPL's current
tariffs (c.Rs750/tscm) are sustainable.
• Robust business model with no commodity risk: GSPL provides a
clean play on increased gas volumes in Gujarat with no
commodity/cyclical risk. GSPL's Gujarat network links supply sources
to all major demand sinks in Gujarat, we envisage volumes to rise to
55mmscmd on the network by FY15E
• Investment in CGD, optionality of new bids are positive: GSPL’s
stake in CGD players with c.4mmscmd of sales volumes is a positive
driver for valuation. Judicious use of leverage in the new networks
GSPL has bid for will support ROEs of 20-25%, leading to significant
value creation. We believe it is too early to build option value for these
bids, given their long gestation but it provides pointers on future growth.
• Price target, valuation, key risks: Our DCF based fair value for
GSPL’s businesses is Rs162. We use a three-stage DCF model to capture
the periods on strong growth in gas volumes in India. Including the value
of CGD investment, our PT for GSPL is Rs165. Key risk is delay in
projects, unfavourable tariff ruling from PNGRB.
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