GSPL enters national arena; all eyes on execution says Goldman Sachs

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GSPL enters national arena; all eyes on balance sheet and execution



GSPL wins two national pipelines, growing outside of Gujarat for
the first time; key stock catalyst plays out
As per Economic Times (Oct 20), GSPL’s consortium has won the rights to two
cross-country natural gas pipelines: 1) a 1,600-km line from Malavaram on the
east coast to Bhilwara in north–west India, and 2) a 1,670-km line from Mehsana
in west to Bhatinda in north, based on lowest tariff bid for the pipelines. Each
pipeline is reported to cost Rs60bn (GSPL’s share: 52%) and is likely to become
operational by FY15-16E, in our view. While details are unclear, we estimate NAV
of Rs12/sh for the two pipelines using 11% WACC and tariffs similar to GAIL. We
think this plays out a major catalyst widely anticipated by the market for GSPL.
Further impetus to the gas industry; enough room for a new-comer
We believe that given the macro outlook for natural gas demand and
domestic gas supply, there is enough room for a new player to operate on
a national scale. Moreover, we find that GSPL’s pipelines are more
complimentary to, rather than in competition with, GAIL’s expansion plans.
No track record outside Gujarat for GSPL; balance sheet size could
limit further growth over the medium term
While this opens up a new area of future growth for GSPL, we believe
execution of projects outside Gujarat for the first time could be a challenge.
Moreover, we estimate that high balance sheet leverage for GSPL could
necessitate meaningful equity dilution for any further capacity expansion
beyond the two pipelines they have won thus far.
GAIL likely to double pipeline network before any of GSPL’s
national pipelines come onstream
Given GSPL’s cross-country pipelines are likely to come onstream by
FY15E the earliest, we believe that if GAIL’s major pipelines were to come
onstream before FY14E it would be able to tap necessary oncoming
domestic gas supplies from ONGC and RIL before GSPL. With comparable
well-head gas prices and tariffs, we believe both GAIL and GSPL should
find enough buyers for their transmitted gas.
Reiterate C-Buy on GAIL with city gas as free option; Buy on GSPL
While we like both GAIL and GSPL, we prefer GAIL owing to its incumbent
national network, balance sheet strength and likely emergence of GAIL Gas
as largest city gas player in the country. Key risk is execution delay.