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Gujarat State Petronet Limited (GSPT.BO): Pure transmission play
at reasonable value; reiterate Buy
Source of opportunity
We increase our 12-month target price to Rs135 (implying 23% potential
upside) from Rs128 earlier, as we now include the value for the
Mallavaram-Bhilwara and Mehsana-Bhatinda pipelines, that were
awarded in 3QFY11 to a consortium in which GSPL has a 52% stake, in
our calculations. A steady outlook on transmission tariffs, high operating
leverage in the high-gas-demand state of Gujarat, along with initiatives
to become a national carrier, visibility on long-term gas supplies and
good project execution track record makes us reiterate GSPL as a Buy.
While domestic gas supplies remain critical to meet India’s long-term
gas demands and the outlook for expensive LNG volumes weak in the
medium-to-long term, in our view, we prefer GSPL because it is the
volume transmitted rather than the source of the gas that dictates its
profitability.
We believe that the market is currently not fully pricing in the earnings
growth potential of GSPL’s core transmission business. Moreover, we
note that we have not considered any benefit from GSPL’s stakes in
parent GSPC group’s city gas projects in our estimates.
Catalyst
1) The key stock performance catalysts include: 1) further ramp-up of D-6
or PLNG gas volumes for Gujarat; 2) steady progress in its pipeline
expansion plans within Gujarat; 3) further developments on GSPC’s gas
production from the KG basin; and 4) successful execution of city gas
projects by the GSPC group.
Valuation
Our 12-month target price of Rs135 for GSPL is based on DCF valuation
of the company’s average transmission tariff, which we project to trend
down to around Rs760/tcm over time. Our tariff assumptions imply
average return (CROCI) of about 13%-15% for GSPL from FY11E-15E.
Key risks
1) Regulation of transmission tariffs below our forecasts; 2) possible
operational hurdles in GSPL’s expansion plans to states other than
Gujarat; 3) delay in gas production volumes; and 4) delay in city gas
projects due to necessary clearances from the regulator.
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