Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GSPL --------------------------------------------------------------------------Upgrade to OUTPERFORM
Volume growth should continue – growing EBITDA, large FCF an attraction
● GSPL reported 3Q FY11 EPS of Rs2.8, having retrospectively cut
depreciation rates from 8.33% to 4.75%. Adjusted EPS of Rs1.92
was ahead of estimates, principally on higher tariffs. A change in
mix away from D6 gas led to longer distance gas shipment.
● GSPL expects to reduce depreciation further to 3.17%. We update our
model for the lower rate, incorporate FY12 volume guidance and mark
to market near-term transportation tariffs. Thus, our FY11/FY12E EPS
increase 19%/25%, and target price increases from Rs114 to Rs117.
● With the commissioning of new power plants near term, capacity
for gas usage within Gujarat should increase. In the absence of
D6 gas, these power plants will have to rely on expensive LNG,
which requires high merchant power rates. Demand for gas and
GSPL transportation volumes could see increased seasonality.
● Though slower, GSPL volumes should grow YoY. There seems to
be little risk to headline tariffs (as happened with GAIL). Earnings
growth should continue. At current valuations, (8.4 P/E, 5.1
EV/EBITDA FY12E) we see little downside risk. We upgrade
GSPL to OUTPERFORM
Headline EPS affected by lower depreciation
GSPL reported 3Q FY11 EPS of Rs2.8, up 74% QoQ. These numbers
are, however, affected by a retrospective (from 1 April 2010) reduction
in depreciation rates from 8.33% to 4.75% (as per the Company’s Act).
Adjusted EPS of Rs1.92 was 23% higher than our estimates.
GSPL plans to reduce depreciation rates further to 3.17% (as is used
by GAIL) and has sought permission from the government to
implement this. We now model the lower rate beginning April 2011.
GSPL currently pays MAT, which is calculated off book profits. Lower
depreciation implies higher near-term cash outflow and is unlikely to
have been implemented if the company expected to remain on MAT
for long. We now assume the company reverts to a higher cash tax
rate by FY13. With this reduction in depreciation, GSPL’s
RoE/segment ROCE are now more comparable to GAIL.
3Q average tariffs increased 9.7% QoQ, as gas was transported
longer distances, most likely as customers shifted from D6 gas to LNG.
Is GSPL ex growth? No
We have maintained that demand for higher-cost LNG will be lower
than that for cheap domestic gas. Yet, top down, we believe GSPL will
continue to see growing volumes, as: (1) KG D6 gas volumes seem to
have stabilised at 53-54 mmscmd, (2) retail/SME consumption of gas
is relatively insensitive to gas prices – volumes will grow with industrial
activity and network penetration, and (3) bulk capacity for gas demand
is growing – more gas-based power plants are expected to be
commissioned in Gujarat over the next two years.
These power plants cannot use LNG for base load generation, but can
consume gas for peaking power, whenever merchant power tariffs are
attractive enough. LNG demand within Gujarat and volumes for GSPL
should therefore see increased seasonality – increasing in summer
months and surprising in years of poor rainfall.
Redeployment of cash flow is perhaps the bigger medium-term
question for GSPL. The company has won bids for three large trunk
pipelines, but project details are yet unavailable. As and when clarity
emerges and gas sourcing strategy for these pipelines becomes clear,
the market may begin to factor these into valuations.
Upgrade to OUTPERFORM
We update our model for the lower depreciation rate, incorporate
FY12 volume guidance and mark to market near-term transportation
tariffs. Thus, our FY11/FY12E EPS increase 19%/25%, target price
increases from Rs114 to Rs117. GSPL then trades at 8.4x FY12E
EPS, 5.1x FY12E EV/EBITDA, and 2.1x FY12 P/B with 28% RoE. We
upgrade the stock to OUTPERFORM from Neutral.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GSPL --------------------------------------------------------------------------Upgrade to OUTPERFORM
Volume growth should continue – growing EBITDA, large FCF an attraction
● GSPL reported 3Q FY11 EPS of Rs2.8, having retrospectively cut
depreciation rates from 8.33% to 4.75%. Adjusted EPS of Rs1.92
was ahead of estimates, principally on higher tariffs. A change in
mix away from D6 gas led to longer distance gas shipment.
● GSPL expects to reduce depreciation further to 3.17%. We update our
model for the lower rate, incorporate FY12 volume guidance and mark
to market near-term transportation tariffs. Thus, our FY11/FY12E EPS
increase 19%/25%, and target price increases from Rs114 to Rs117.
● With the commissioning of new power plants near term, capacity
for gas usage within Gujarat should increase. In the absence of
D6 gas, these power plants will have to rely on expensive LNG,
which requires high merchant power rates. Demand for gas and
GSPL transportation volumes could see increased seasonality.
● Though slower, GSPL volumes should grow YoY. There seems to
be little risk to headline tariffs (as happened with GAIL). Earnings
growth should continue. At current valuations, (8.4 P/E, 5.1
EV/EBITDA FY12E) we see little downside risk. We upgrade
GSPL to OUTPERFORM
Headline EPS affected by lower depreciation
GSPL reported 3Q FY11 EPS of Rs2.8, up 74% QoQ. These numbers
are, however, affected by a retrospective (from 1 April 2010) reduction
in depreciation rates from 8.33% to 4.75% (as per the Company’s Act).
Adjusted EPS of Rs1.92 was 23% higher than our estimates.
GSPL plans to reduce depreciation rates further to 3.17% (as is used
by GAIL) and has sought permission from the government to
implement this. We now model the lower rate beginning April 2011.
GSPL currently pays MAT, which is calculated off book profits. Lower
depreciation implies higher near-term cash outflow and is unlikely to
have been implemented if the company expected to remain on MAT
for long. We now assume the company reverts to a higher cash tax
rate by FY13. With this reduction in depreciation, GSPL’s
RoE/segment ROCE are now more comparable to GAIL.
3Q average tariffs increased 9.7% QoQ, as gas was transported
longer distances, most likely as customers shifted from D6 gas to LNG.
Is GSPL ex growth? No
We have maintained that demand for higher-cost LNG will be lower
than that for cheap domestic gas. Yet, top down, we believe GSPL will
continue to see growing volumes, as: (1) KG D6 gas volumes seem to
have stabilised at 53-54 mmscmd, (2) retail/SME consumption of gas
is relatively insensitive to gas prices – volumes will grow with industrial
activity and network penetration, and (3) bulk capacity for gas demand
is growing – more gas-based power plants are expected to be
commissioned in Gujarat over the next two years.
These power plants cannot use LNG for base load generation, but can
consume gas for peaking power, whenever merchant power tariffs are
attractive enough. LNG demand within Gujarat and volumes for GSPL
should therefore see increased seasonality – increasing in summer
months and surprising in years of poor rainfall.
Redeployment of cash flow is perhaps the bigger medium-term
question for GSPL. The company has won bids for three large trunk
pipelines, but project details are yet unavailable. As and when clarity
emerges and gas sourcing strategy for these pipelines becomes clear,
the market may begin to factor these into valuations.
Upgrade to OUTPERFORM
We update our model for the lower depreciation rate, incorporate
FY12 volume guidance and mark to market near-term transportation
tariffs. Thus, our FY11/FY12E EPS increase 19%/25%, target price
increases from Rs114 to Rs117. GSPL then trades at 8.4x FY12E
EPS, 5.1x FY12E EV/EBITDA, and 2.1x FY12 P/B with 28% RoE. We
upgrade the stock to OUTPERFORM from Neutral.
No comments:
Post a Comment