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Gujarat State Petronet (GSPT.BO)
Reiterate Buy: Robust 3Q; New TP of Rs150
Operationally strong quarter — GSPL reported a strong 3Q, driven by higher
tariffs and strong margins (94%). Revenues were up 10% qoq, led by higher avg
realisations of Rs849/tcm (Rs776 in 2Q). Vols stayed flat at 35 mmscmd (trending
at c38 currently) as lower KG gas vols were offset by higher LNG vols from PLNG.
PAT boosted by (welcome) change in deprec policy — Reported PAT came in
at Rs1.59bn, boosted by a change in deprec policy and higher EBITDA. GSPL has
changed its deprec rate from 8.33% to 4.75% SLM w.e.f. Apr, taking the 9M impact
(Rs755m) in 3Q. Adjusting for this, we estimate 3Q PAT (based on the new policy)
at ~Rs1.25bn. While cash earnings are more pertinent, we nevertheless view this
change +vely, as the earlier higher rate under-stated profits and failed to capture
true earnings potential, esp. compared with GAIL (3.17% rate). Mgmt in fact said
that it is seeking approval for a further reduction in the rate to align it with GAIL’s.
New TP of Rs150 — Our upward earnings revision of 21/25/32% over
FY11/12/13E is primarily to factor in the new deprec rates. However, our EBITDA
is cut 4-6% to factor in lower vols of 41/45 mmscmd over FY12/13E (44/49 earlier),
primarily on the back of continued delay in KG gas ramp up. Our tariff assumptions
still remain conservative at Rs780/tcm over FY12/13E (Rs796 in 9M; Rs849 in
3Q). We also roll fwd our DCF to Sep-11E and revise our TP to Rs150 on the back
of the changes.
Maintain Buy; cheapest gas stock — GSPL is the cheapest gas stock in our
universe – P/E of 10.1x vs. 13-14x for peers, P/CEPS of 7x vs. 10-11x, EV/Ebitda
of 5.9x vs. 8-9x. Key triggers: (i) expected vol growth from 4Q, driven by LNG, (ii)
clarity on tariffs (GSPL expects to file new tariffs with the regulator by Mar, though
final approval could be few mths away), (iii) authorizations for 3 new pipelines won
through bidding (once Supreme Court issues are resolved), and (iv) visibility on
new supplies/LNG terminals. While some of these triggers could be slightly backended, the recent correction acts as a good buying opportunity with a 12-mth view
Reiterate Buy: Robust 3Q; TP of Rs150
New target price of Rs150
We now base our target price of Rs150 on our Sep-11E (Mar-11E earlier) DCF
value, adjusted for our revised estimates (as shown in Figure 2), and the
change in GSPL’s depreciation policy (which impacts the tax outgo). To our
core DCF-value of GSPL’s Gujarat network (Rs119/sh), we add the Rs31/sh
value accretion from the two key new pipelines (Mehsana-Bhatinda and
Mallavaram Bhilwara).
We revise our volume assumptions based on latest updates and volume trends.
We now forecast volumes of 41/45 mmscmd over FY12/13E vs. 44/49 earlier.
Our tariff assumptions still remain conservative at Rs780/tcm over FY12/13E
vs. Rs796 in 9MFY11 and Rs849 in 3Q.
Revising earnings on new depreciation policy
We revise our earnings for GSPL by 21%-32% over FY11-13E. The key reason
for the upward revision is to account for a change in GSPL’s depreciation
policy. The company has revised its rate of depreciation on pipelines from
8.33% SLM to 4.75% SLM w.e.f. Apr’10. As a result we expect its aggregate
depreciation rate to reduce from 8.3-8.7% to 5.5-5.6% over FY11-12E. While
we have always focused on earnings normalized for the high depreciation, we
believe that this change in policy is a positive, as reported earnings will now be
a better indicator of GSPL’s true earnings potential. Besides, mgmt has also
stated its intent to further reduce its depreciation rate on pipelines to 3.17% to
align it with GAIL’s depreciation rate, and will do so once it receives the
approval for the same (likely in the current financial year). Our EBITDA
forecasts are, however, down 4-6% on the back of our lower volume
assumptions as highlighted above.
Update on Gujarat volumes
GSPL’s current volumes are trending at ~38 mmscmd. While KG gas volumes
have declined, GSPL has seen a pick-up in LNG volumes, and mgmt expects
LNG to be the key driver of its volumes going forward. Mgmt expects FY12E
volumes to exceed 40 mmscmd. Specifically, mgmt expects increased gas
supplies from the following:
GSPL is currently transporting only c1.5 mmscmd of LNG from Shell’s Hazira
terminal. GSPL believes that total vols from Shell can go up to c12 mmscmd
(peak capacity), of which GSPL can theoretically transport up to ~80-90% of
volumes, depending on where the customer is situated (on its own or GAIL’s
network).
Additional volumes from Petronet LNG, which did not operate at full capacity
for 3Q, and could ramp-up further going forward.
On the demand side, GSPL expects the following to add to volumes:
Two units of GSPC’s power Plants at Hazira and Pipavav (~2.8 mmscmd for
the two 350 MW units commencing in Apr 11 and Jun 11).
Potential demand from ~700 MW of gas-based power capacity lying idle in
Gujarat, which could commence operations in the future.
GNFC (c0.7 mmscmd) should commence by Mar 11,
Longer term, mgmt sees demand from: 1) Torrent’s 1850 MW commissioning
in 2013 (GSPL is already catering to Torrent’s existing 1100 MW capacity), 2)
GSEG’s 370 MW power plant (peak demand of 1.7 mmscmd), 3) power
plants of DMIC (Delhi-Mumbai Industrial Corridor).
Volumes for the new pipelines
We believe that some of the concerns on no visibility of gas supplies for the
new pipeline bids that GSPL has won (Mallavaram-Bhilwara, MehsanaBhatinda, and Bhatinda-Jammu/Srinagar) are exaggerated. Over the next 4-5
years, new gas supplies in India are likely to emerge from among the following
sources:
GSPC's gas from KG basin (~10 mmscmd peak),
GSPC's gas from Cambay basin (~5 mmscmd peak),
RIL's KG gas (incremental >30 mmscmd from current levels of 54-55
mmscmd),
5-6 MMTPA Mundra LNG terminal (~20-24 mmscmd peak), and
PLNG's Dahej terminal expansion (6-8 mmscmd incremental).
This is a cumulative >90 mmscmd of incremental supplies over the next few
years. Admittedly, there are pipelines other than GSPL’s which would be
transporting a large portion of this gas, but this is still more than sufficient to
justify the investment in the new pipelines which are still over three years away
from completion.
Gujarat State Petronet
Valuation
Our Rs150 target price is based on: (i) our Sep-11E DCF fair value of Rs119 for
the existing business, and (ii) Rs31/sh value accretion from the two new
pipelines. Our DCF assumptions for the existing business are based on gas
volumes tied up with Reliance, expected incremental volumes to be consumed
in Gujarat, and announced capex plans. We use DCF given the utility nature of
the business, with steady cash flows, and to capture the value of the business
over the longer term. Our DCF valuation is based on explicit forecasts until
FY13E, an 11% CAGR of volumes over FY11-13E, FY13E transported volumes
of 45 mmscmd, and a terminal growth of 3.0%. We use a WACC of 10.7% (riskfree 7.5%, risk premium 6.0%, beta of 1.0, cost of equity 13.5%, cost of debt
10.0%, target D/E of 0.7x). For the new pipelines, we value Mehsana-Bhatinda
at Rs20/sh and Mallavaram-Bhatinda at Rs14/sh based on our NPV analysis
(yielding 17% and 14% IRRs respectively). We ascribe a 10% discount to the
NPVs to account for the back-ended nature of returns from these pipelines. On
a P/B basis, GSPL would trade at 2.3x FY13E on our core DCF-value of Rs119,
which we believe is reasonable given adjusted ROEs of >20% over the next
few years.
Risks
We assign a Medium Risk rating to GSPL shares based on our quantitative risk
rating system. Key downside risks that could prevent the shares from reaching
our target price include: 1) Adverse impact, if any, of regulation of gas pipeline
tariffs by the Petroleum and Natural Gas Regulatory Board; 2) Delay in ramp up
of new gas supplies; 3) Project risk - GSPL is implementing expansion of its
pipeline network that is subject to time and cost over-runs that could impact
earnings; 4) Worsening of economics of LNG, which could impact volumes; 5)
Significant delay in authorizations of its new pipelines, and 6) Political risk - we
currently assume no contribution towards socio-economic projects of the state
gov’t.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Gujarat State Petronet (GSPT.BO)
Reiterate Buy: Robust 3Q; New TP of Rs150
Operationally strong quarter — GSPL reported a strong 3Q, driven by higher
tariffs and strong margins (94%). Revenues were up 10% qoq, led by higher avg
realisations of Rs849/tcm (Rs776 in 2Q). Vols stayed flat at 35 mmscmd (trending
at c38 currently) as lower KG gas vols were offset by higher LNG vols from PLNG.
PAT boosted by (welcome) change in deprec policy — Reported PAT came in
at Rs1.59bn, boosted by a change in deprec policy and higher EBITDA. GSPL has
changed its deprec rate from 8.33% to 4.75% SLM w.e.f. Apr, taking the 9M impact
(Rs755m) in 3Q. Adjusting for this, we estimate 3Q PAT (based on the new policy)
at ~Rs1.25bn. While cash earnings are more pertinent, we nevertheless view this
change +vely, as the earlier higher rate under-stated profits and failed to capture
true earnings potential, esp. compared with GAIL (3.17% rate). Mgmt in fact said
that it is seeking approval for a further reduction in the rate to align it with GAIL’s.
New TP of Rs150 — Our upward earnings revision of 21/25/32% over
FY11/12/13E is primarily to factor in the new deprec rates. However, our EBITDA
is cut 4-6% to factor in lower vols of 41/45 mmscmd over FY12/13E (44/49 earlier),
primarily on the back of continued delay in KG gas ramp up. Our tariff assumptions
still remain conservative at Rs780/tcm over FY12/13E (Rs796 in 9M; Rs849 in
3Q). We also roll fwd our DCF to Sep-11E and revise our TP to Rs150 on the back
of the changes.
Maintain Buy; cheapest gas stock — GSPL is the cheapest gas stock in our
universe – P/E of 10.1x vs. 13-14x for peers, P/CEPS of 7x vs. 10-11x, EV/Ebitda
of 5.9x vs. 8-9x. Key triggers: (i) expected vol growth from 4Q, driven by LNG, (ii)
clarity on tariffs (GSPL expects to file new tariffs with the regulator by Mar, though
final approval could be few mths away), (iii) authorizations for 3 new pipelines won
through bidding (once Supreme Court issues are resolved), and (iv) visibility on
new supplies/LNG terminals. While some of these triggers could be slightly backended, the recent correction acts as a good buying opportunity with a 12-mth view
Reiterate Buy: Robust 3Q; TP of Rs150
New target price of Rs150
We now base our target price of Rs150 on our Sep-11E (Mar-11E earlier) DCF
value, adjusted for our revised estimates (as shown in Figure 2), and the
change in GSPL’s depreciation policy (which impacts the tax outgo). To our
core DCF-value of GSPL’s Gujarat network (Rs119/sh), we add the Rs31/sh
value accretion from the two key new pipelines (Mehsana-Bhatinda and
Mallavaram Bhilwara).
We revise our volume assumptions based on latest updates and volume trends.
We now forecast volumes of 41/45 mmscmd over FY12/13E vs. 44/49 earlier.
Our tariff assumptions still remain conservative at Rs780/tcm over FY12/13E
vs. Rs796 in 9MFY11 and Rs849 in 3Q.
Revising earnings on new depreciation policy
We revise our earnings for GSPL by 21%-32% over FY11-13E. The key reason
for the upward revision is to account for a change in GSPL’s depreciation
policy. The company has revised its rate of depreciation on pipelines from
8.33% SLM to 4.75% SLM w.e.f. Apr’10. As a result we expect its aggregate
depreciation rate to reduce from 8.3-8.7% to 5.5-5.6% over FY11-12E. While
we have always focused on earnings normalized for the high depreciation, we
believe that this change in policy is a positive, as reported earnings will now be
a better indicator of GSPL’s true earnings potential. Besides, mgmt has also
stated its intent to further reduce its depreciation rate on pipelines to 3.17% to
align it with GAIL’s depreciation rate, and will do so once it receives the
approval for the same (likely in the current financial year). Our EBITDA
forecasts are, however, down 4-6% on the back of our lower volume
assumptions as highlighted above.
Update on Gujarat volumes
GSPL’s current volumes are trending at ~38 mmscmd. While KG gas volumes
have declined, GSPL has seen a pick-up in LNG volumes, and mgmt expects
LNG to be the key driver of its volumes going forward. Mgmt expects FY12E
volumes to exceed 40 mmscmd. Specifically, mgmt expects increased gas
supplies from the following:
GSPL is currently transporting only c1.5 mmscmd of LNG from Shell’s Hazira
terminal. GSPL believes that total vols from Shell can go up to c12 mmscmd
(peak capacity), of which GSPL can theoretically transport up to ~80-90% of
volumes, depending on where the customer is situated (on its own or GAIL’s
network).
Additional volumes from Petronet LNG, which did not operate at full capacity
for 3Q, and could ramp-up further going forward.
On the demand side, GSPL expects the following to add to volumes:
Two units of GSPC’s power Plants at Hazira and Pipavav (~2.8 mmscmd for
the two 350 MW units commencing in Apr 11 and Jun 11).
Potential demand from ~700 MW of gas-based power capacity lying idle in
Gujarat, which could commence operations in the future.
GNFC (c0.7 mmscmd) should commence by Mar 11,
Longer term, mgmt sees demand from: 1) Torrent’s 1850 MW commissioning
in 2013 (GSPL is already catering to Torrent’s existing 1100 MW capacity), 2)
GSEG’s 370 MW power plant (peak demand of 1.7 mmscmd), 3) power
plants of DMIC (Delhi-Mumbai Industrial Corridor).
Volumes for the new pipelines
We believe that some of the concerns on no visibility of gas supplies for the
new pipeline bids that GSPL has won (Mallavaram-Bhilwara, MehsanaBhatinda, and Bhatinda-Jammu/Srinagar) are exaggerated. Over the next 4-5
years, new gas supplies in India are likely to emerge from among the following
sources:
GSPC's gas from KG basin (~10 mmscmd peak),
GSPC's gas from Cambay basin (~5 mmscmd peak),
RIL's KG gas (incremental >30 mmscmd from current levels of 54-55
mmscmd),
5-6 MMTPA Mundra LNG terminal (~20-24 mmscmd peak), and
PLNG's Dahej terminal expansion (6-8 mmscmd incremental).
This is a cumulative >90 mmscmd of incremental supplies over the next few
years. Admittedly, there are pipelines other than GSPL’s which would be
transporting a large portion of this gas, but this is still more than sufficient to
justify the investment in the new pipelines which are still over three years away
from completion.
Gujarat State Petronet
Valuation
Our Rs150 target price is based on: (i) our Sep-11E DCF fair value of Rs119 for
the existing business, and (ii) Rs31/sh value accretion from the two new
pipelines. Our DCF assumptions for the existing business are based on gas
volumes tied up with Reliance, expected incremental volumes to be consumed
in Gujarat, and announced capex plans. We use DCF given the utility nature of
the business, with steady cash flows, and to capture the value of the business
over the longer term. Our DCF valuation is based on explicit forecasts until
FY13E, an 11% CAGR of volumes over FY11-13E, FY13E transported volumes
of 45 mmscmd, and a terminal growth of 3.0%. We use a WACC of 10.7% (riskfree 7.5%, risk premium 6.0%, beta of 1.0, cost of equity 13.5%, cost of debt
10.0%, target D/E of 0.7x). For the new pipelines, we value Mehsana-Bhatinda
at Rs20/sh and Mallavaram-Bhatinda at Rs14/sh based on our NPV analysis
(yielding 17% and 14% IRRs respectively). We ascribe a 10% discount to the
NPVs to account for the back-ended nature of returns from these pipelines. On
a P/B basis, GSPL would trade at 2.3x FY13E on our core DCF-value of Rs119,
which we believe is reasonable given adjusted ROEs of >20% over the next
few years.
Risks
We assign a Medium Risk rating to GSPL shares based on our quantitative risk
rating system. Key downside risks that could prevent the shares from reaching
our target price include: 1) Adverse impact, if any, of regulation of gas pipeline
tariffs by the Petroleum and Natural Gas Regulatory Board; 2) Delay in ramp up
of new gas supplies; 3) Project risk - GSPL is implementing expansion of its
pipeline network that is subject to time and cost over-runs that could impact
earnings; 4) Worsening of economics of LNG, which could impact volumes; 5)
Significant delay in authorizations of its new pipelines, and 6) Political risk - we
currently assume no contribution towards socio-economic projects of the state
gov’t.
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