GSPL- Buy: Remain +ve; TP Raised to Rs143 :: Citi

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Gujarat State Petronet (GSPT.BO)
Buy: 2Q Below Expectations, But Remain +ve; TP Raised to Rs143
 Correction offers buying opportunity; raise TP to Rs143 — The stock has corrected
recently on the back of: (i) likely profit taking after the pipeline wins, (ii)
disappointing 2Q. We, however, remain fundamentally positive and view any major
stock correction as a buying opportunity on a 6-12 mth basis. We raise our TP to
Rs143 as we conservatively incorporate Rs15/sh value accretion from the two new
pipelines (25% discount to lower end of our estd. value accretion of ~Rs10-15/sh
per pipeline), even as value of the existing business reduces to Rs128 (from
Rs135). Key near-term triggers – (i) clarity on new pipeline tariffs (likely within the
next few weeks), (ii) tariff clarity on existing network (likely by 4FY11E).
 2Q below expectations — PAT of Rs915m was down 17% yoy, 13% qoq, and
below estimates. While revenues were in line, costs were higher than expected,
impacting margins. However, we believe modest quarterly fluctuations in expenses
are part of the business, and would not be too concerned at this juncture.
 Vols flat, but in line; margins disappoint — Vols of 35 mmscmd and avg
realisations of Rs776/tcm were largely in line with ests. and also flat sequentially.
However, higher operating costs resulted in EBITDA margins declining to 91.8%
(from 94.6% in 1Q, 93.7% in FY10). While this is still in line with mgmt’s past
guidance of 90-95% margins, the result nevertheless has a disproportionate
impact on bottom line given high operating leverage. Interest and depreciation
were also up in 2Q due to capitalisation of new pipelines and wind mills.
 Vols to pick up in 2H — 3Q vols should see a slight pick up with increase in LNG
imports and commencement of vols to Essar Oil. Vols are currently trending at c37
mmscmd – with commencement of GNFC and GSEG as well as ramp up of some
idle power capacities, GSPL could end FY11 at ~40-42 mmscmd. However, we
reduce FY11-13E earnings by 7-11% to factor in slower than earlier expected vol
growth, forecasting 37/44/49 mmscmd over FY11/12/13E vs. 40/45/50 earlier.