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Gujarat State Petronet (GSPT.BO, Buy)
Source of opportunity
We lower our 12-month target price to Rs120 (implying 16% potential
upside) from Rs135 earlier, to reflect the valuation without the two
pipelines, which are still awaiting regulatory approval. However, we
maintain our Buy rating on GSPL, with steady outlook on transmission
tariffs, high operating leverage in the high-gas-demand state of Gujarat,
visibility on long-term gas supplies and sound project execution track
record.
While domestic gas supplies remain critical to meet India’s long-term
gas demands, in our view, we prefer GSPL because it is the volume
transmitted rather than the source of the gas that dictates its
profitability. The increase in LNG imports would substitute to some
extent for the delay in domestic gas production, in our view.
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
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) approval for the two pipeline bids
won. 4) Further developments on GSPC’s gas production from the KG
basin; and 5) successful execution of city gas projects by the GSPC
group.
Valuation
Our 12-month target price of Rs120 for GSPL is based on DCF valuation
of the company’s average transmission tariff, which we project to trend
down to around Rs710/tcm over time. Our tariff assumptions imply
average return (CROCI) of about 15% for GSPL from FY12E-15E. We
have revised our earnings for FY12E-FY13E by 14%-24% to reflect the
new depreciation policy adopted by the company.
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.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Gujarat State Petronet (GSPT.BO, Buy)
Source of opportunity
We lower our 12-month target price to Rs120 (implying 16% potential
upside) from Rs135 earlier, to reflect the valuation without the two
pipelines, which are still awaiting regulatory approval. However, we
maintain our Buy rating on GSPL, with steady outlook on transmission
tariffs, high operating leverage in the high-gas-demand state of Gujarat,
visibility on long-term gas supplies and sound project execution track
record.
While domestic gas supplies remain critical to meet India’s long-term
gas demands, in our view, we prefer GSPL because it is the volume
transmitted rather than the source of the gas that dictates its
profitability. The increase in LNG imports would substitute to some
extent for the delay in domestic gas production, in our view.
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
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) approval for the two pipeline bids
won. 4) Further developments on GSPC’s gas production from the KG
basin; and 5) successful execution of city gas projects by the GSPC
group.
Valuation
Our 12-month target price of Rs120 for GSPL is based on DCF valuation
of the company’s average transmission tariff, which we project to trend
down to around Rs710/tcm over time. Our tariff assumptions imply
average return (CROCI) of about 15% for GSPL from FY12E-15E. We
have revised our earnings for FY12E-FY13E by 14%-24% to reflect the
new depreciation policy adopted by the company.
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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