GSPL-2Q FY11 results: depreciation pulls down earnings: Daiwa

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Gujarat State Petronet (GUJS IN) Rating:1
2Q FY11 results: depreciation pulls down earnings below our forecasts



What has changed?
• Gujarat State Petronet (GSPL) announced a net profit of Rs915m for 2Q FY11,
down 17% YoY, down 13% QoQ, and 10% lower than our forecast of
Rs1.01bn, due primarily to higher depreciation than we expected.
Impact
• Gas-transportation volume for the second quarter was 35.3 mmscmd, slightly
lower than our forecast of 36 mmscmd. We forecast an average volume of 37
mmscmd for FY11, rising to 42.9 mmscmd for FY12.
• Implied gas-transportation tariffs of Rs778/tscm for 2Q FY11 were higher than our
forecast of Rs762/tscm. After several quarters of sequential declines, implied tariffs
increased by 2% QoQ. Our valuation of GSPL is based on our assumptions of a
tariff of Rs780/tscm, which is close to the current tariffs, and we do not see much
downside risk to our tariff assumption.
• The increase in costs was higher than our forecasts due to various one-off items.
Staff costs were higher than we expected due to a one-time payment of
performance incentives and arrears. Administration costs were higher than our
forecast due to a donation.
• Depreciation was also higher than we expected, due to additional depreciation
for a wind farm commissioned recently. The tax benefit from the company’s
wind farm was reflected in a lower current tax rate (12%) for 2Q FY11,
compared with a rate of about 30% for each of 1Q FY11 and 2Q FY10.
• We have revised down our EPS forecasts by 3.5%, 3.7%, and 3.4%,
respectively, for FY11, FY12 and FY13, to reflect higher depreciation
compared with our prior forecasts.
Valuation
• We maintain our six-month target price of Rs127, based on our DCF valuation
with assumptions of a long-term growth rate of 2%, long-term gastransportation
volume of 55 mmscmd and tariffs of Rs780/tscm. Our valuation
does not attribute any value to the new pipelines.
Catalysts and action
• We maintain our 1 (Buy) rating on GSPL. We believe the current share price does
not reflect entirely the full potential of the existing pipeline network in Gujarat. In
our view, the result of the bid process for the Bhatinda-Jammu pipeline and news
on the ramp-up of gas output at the D6 field should be key catalysts for the stock.