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GSPL (GUJS)
Energy
Tough times ahead. We see increasing risk to the volumes for GSPL in light of
(1) continuous decline gas supply from RIL’s KG D-6 block and (2) a sharp increase in
spot LNG prices which may hamper its competitiveness versus liquid fuels. We maintain
our SELL rating on the stock with a DCF-based target price of `92 noting downside risks
from (1) potential cut in transmission tariffs in order to align returns to the regulated
levels and (2) lower-than-expected volumes. We have updated our earnings model for
FY2011 annual report.
Risk to volumes from (1) decline in KG D-6 gas supply and (2) increase in spot LNG prices
We highlight risk to GSPL’s transmission volumes from (1) a decline in supply from RIL’s KG d-6
block and (2) potentially lower off-take of imported LNG in India given the sharp rise in prices of
spot LNG. We note that supply from RIL’s KG D-6 block has declined to 43.9 mcm/d in the recent
week versus 48.6 mcm/d in 1QFY12. We also highlight risk from a sharp increase in spot LNG
prices to ~US$15/mn BTU (FOB). We expect some substitution of spot LNG with liquid fuels given
the better economics at the current level of relative prices. We highlight that RIL has already
reduced the off-take of natural gas in the current quarter. We note that the economics could tilt in
favor of liquid fuels given (1) potentially higher spot LNG prices during winters in the northern
hemisphere and (2) potential decline in crude oil prices from weakening demand.
2QFY12E may be a weak quarter
We estimate GSPL will report a qoq decline in EBITDA to `2.52 bn in 2QFY12E from `2.65 bn in
1QFY12 led by lower volumes at 35.7 mcm/d versus 36.8 mcm/d in the previous quarter. We
estimate net income to decline by 8% qoq to `1.26 bn. We have assumed flat tariffs qoq for
2QFY12E at `0.81/cu m.
Retain SELL with a target price of `92
We maintain our SELL rating on GSPL stock given (1) 9% potential downside to our target price of
`92 and (2) potential downside from any cut in GSPL’s transportation tariffs for its existing
network. We find the current tariff too high since it translates into an estimated pre-tax ROCE of
25.6% based on FY2011 data versus allowed returns of 18%. It is possible that the regulator may
allow higher-than-expected tariffs (note the case of GAIL’s HVJ system) but we do not want to rely
on regulatory oversight as an investment thesis.
Revised earnings
We have revised FY2012E, FY2013E and FY2014E EPS to `8.5, `8.4 and `10.3 from `8.5, `8.4
and `10 to reflect (1) FY2011 annual report, (2) lower gas transmission volumes and (3) higher
transmission tariffs. We model gas transmission volumes for FY2012E, FY2013E and FY2014E at
36.1 mcm/d, 40.6 mcm/d and 44.1 mcm/d versus 35.6 mcm/d in FY2011.
Updates from FY2011 annual report
Average cost of borrowings at 9.7%. We compute GSPL’s average borrowing cost at
9.7% for FY2011 versus 9.2% for FY2010. The company expensed `961 mn and
capitalized `373 mn in FY2011 versus `938 mn and `169 mn in FY2010.
Change in depreciation policy. We highlight that the company has changed its rate of
depreciation for gas pipelines to 3.17% versus 8.33% which resulted in a reduction in
depreciation by `1.42 bn in FY2011.
Change in accounting policy. The company has changed its accounting policy for
treatment of ‘Land compensation relating to RoU’ and ‘non-refundable RoW payments’
as part of Intangible assets versus plant and machinery previously. This resulted in a writeback
of depreciation amounting to `234 mn provided upto FY2010.
Decline in firm supply of gas under Gas Transmission Agreements (GTAs). GSPL has
signed firm GTAs for transporting 32.76 mcm/d of gas and interruptible/short-term GTAs
for 6.16 mcm/d in FY2012E versus 35.46 mcm/d and 6.49 mcm/d for FY2011.
Commencement of wind power project. The company has commissioned its wind
power project with an installed capacity of 53.5 MW. We note that this segment
contributed `159 mn to the company’s revenues and `45 mn to the EBIT in 1QFY12.
Earnings assumptions
Exhibit 1 gives our DCF valuation of GSPL.
Gas transportation volumes. We have revised our transmission volumes assumption for
FY2012-14E to 36.1 mcm/d, 40.6 mcm/d and 44.1 mcm/d versus 37.1 mcm/d, 43.6
mcm/d and 47.1 mcm/d previously.
Gas transportation charges. We model FY2012E, FY2013E and FY2014E gas
transportation tariffs at `0.78/cu m, `0.69/cu m and `0.71/cu m. We note that our
assumptions result in a healthy 15.4% CROCI in FY2012-14E.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GSPL (GUJS)
Energy
Tough times ahead. We see increasing risk to the volumes for GSPL in light of
(1) continuous decline gas supply from RIL’s KG D-6 block and (2) a sharp increase in
spot LNG prices which may hamper its competitiveness versus liquid fuels. We maintain
our SELL rating on the stock with a DCF-based target price of `92 noting downside risks
from (1) potential cut in transmission tariffs in order to align returns to the regulated
levels and (2) lower-than-expected volumes. We have updated our earnings model for
FY2011 annual report.
Risk to volumes from (1) decline in KG D-6 gas supply and (2) increase in spot LNG prices
We highlight risk to GSPL’s transmission volumes from (1) a decline in supply from RIL’s KG d-6
block and (2) potentially lower off-take of imported LNG in India given the sharp rise in prices of
spot LNG. We note that supply from RIL’s KG D-6 block has declined to 43.9 mcm/d in the recent
week versus 48.6 mcm/d in 1QFY12. We also highlight risk from a sharp increase in spot LNG
prices to ~US$15/mn BTU (FOB). We expect some substitution of spot LNG with liquid fuels given
the better economics at the current level of relative prices. We highlight that RIL has already
reduced the off-take of natural gas in the current quarter. We note that the economics could tilt in
favor of liquid fuels given (1) potentially higher spot LNG prices during winters in the northern
hemisphere and (2) potential decline in crude oil prices from weakening demand.
2QFY12E may be a weak quarter
We estimate GSPL will report a qoq decline in EBITDA to `2.52 bn in 2QFY12E from `2.65 bn in
1QFY12 led by lower volumes at 35.7 mcm/d versus 36.8 mcm/d in the previous quarter. We
estimate net income to decline by 8% qoq to `1.26 bn. We have assumed flat tariffs qoq for
2QFY12E at `0.81/cu m.
Retain SELL with a target price of `92
We maintain our SELL rating on GSPL stock given (1) 9% potential downside to our target price of
`92 and (2) potential downside from any cut in GSPL’s transportation tariffs for its existing
network. We find the current tariff too high since it translates into an estimated pre-tax ROCE of
25.6% based on FY2011 data versus allowed returns of 18%. It is possible that the regulator may
allow higher-than-expected tariffs (note the case of GAIL’s HVJ system) but we do not want to rely
on regulatory oversight as an investment thesis.
Revised earnings
We have revised FY2012E, FY2013E and FY2014E EPS to `8.5, `8.4 and `10.3 from `8.5, `8.4
and `10 to reflect (1) FY2011 annual report, (2) lower gas transmission volumes and (3) higher
transmission tariffs. We model gas transmission volumes for FY2012E, FY2013E and FY2014E at
36.1 mcm/d, 40.6 mcm/d and 44.1 mcm/d versus 35.6 mcm/d in FY2011.
Updates from FY2011 annual report
Average cost of borrowings at 9.7%. We compute GSPL’s average borrowing cost at
9.7% for FY2011 versus 9.2% for FY2010. The company expensed `961 mn and
capitalized `373 mn in FY2011 versus `938 mn and `169 mn in FY2010.
Change in depreciation policy. We highlight that the company has changed its rate of
depreciation for gas pipelines to 3.17% versus 8.33% which resulted in a reduction in
depreciation by `1.42 bn in FY2011.
Change in accounting policy. The company has changed its accounting policy for
treatment of ‘Land compensation relating to RoU’ and ‘non-refundable RoW payments’
as part of Intangible assets versus plant and machinery previously. This resulted in a writeback
of depreciation amounting to `234 mn provided upto FY2010.
Decline in firm supply of gas under Gas Transmission Agreements (GTAs). GSPL has
signed firm GTAs for transporting 32.76 mcm/d of gas and interruptible/short-term GTAs
for 6.16 mcm/d in FY2012E versus 35.46 mcm/d and 6.49 mcm/d for FY2011.
Commencement of wind power project. The company has commissioned its wind
power project with an installed capacity of 53.5 MW. We note that this segment
contributed `159 mn to the company’s revenues and `45 mn to the EBIT in 1QFY12.
Earnings assumptions
Exhibit 1 gives our DCF valuation of GSPL.
Gas transportation volumes. We have revised our transmission volumes assumption for
FY2012-14E to 36.1 mcm/d, 40.6 mcm/d and 44.1 mcm/d versus 37.1 mcm/d, 43.6
mcm/d and 47.1 mcm/d previously.
Gas transportation charges. We model FY2012E, FY2013E and FY2014E gas
transportation tariffs at `0.78/cu m, `0.69/cu m and `0.71/cu m. We note that our
assumptions result in a healthy 15.4% CROCI in FY2012-14E.
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