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Earnings Hedged, it is Repository of Immense Value
Gujarat State Petronet (GSPL) is the top pick in our gas sector coverage
universe due to the following reasons: (1) Earnings fairly protected despite
fall in Krishna Godavari Basin-D6 gas block’s output, (2) It is a direct play on
softening spot RLNG prices, (3) Gas transmission volume bottoming out in
3QFY12 with assured supply of one cargo shipment per month, and (4) The
company graduating from a regional transmitter of gas to a pan-India player
soon. We believe the market is focusing on near-term earnings, ignoring
long-term value creation. We assign Buy rating to GSPL with a TP of Rs98.
Stock trading ~25% below fair value: We have valued GSPL on SOTP basis with
Gujarat transmission business valued at Rs112, investment in city gas distribution
(CGD) at 15x at Rs12.34 and the new pipelines at (-)Rs16.35 to arrive at a fair value of
Rs98. We have valued the new pipelines at the stated levelised tariff with capacity
utilisation conservatively kept at 30%/40%/50% in the initial three years of operations,
respectively.
Market overestimating downside from final Gujarat tariff: We have assumed tariff
of Rs840/Rs800/Rs790/tscm for FY12E/13E/14E, respectively. The current stock price
implies that Gujarat final tariff would stabilise at Rs715/tscm from FY14E.
Stake in fast growing CGD space: GSPL holds a stake in one of the fastest growing
CGD businesses in India in Gujarat. It holds ~36.59% stake in GSPC Gas and 13.75%
stake in Sabarmati Gas. GSPC Gas has witnessed volume CAGR of more than 200%
over FY07-11, despite sourcing gas supplies entirely from overseas.
Declining volume to stabilise soon; softening LNG prices to boost volume: We
estimate volumes to average 34.90/36.75/38.5mmscmd in FY12E/13E/14E,
respectively. LNG prices have been softening since November 2011 and we expect
volume growth to pick up, driven largely by users in power and refining sectors like
Torrent Power, Essar Oil etc.
Most predictable earnings stream compared to peers: GSPL derives its entire
income from regulated gas transmission business unlike other players in the chain
(GAIL, Petronet LNG, Indraprastha Gas, Gujarat Gas) whose earnings also depend on
cyclical factors. GAIL faces the twin overhang of subsidy burden and marketing margin
limit, while the rest of the companies excluding GSPL face the proverbial “unknown
unknown” on marketing margin. Though GSPL faces tariff overhangs, we believe the
same is already discounted in its share price and is treated as “known unknown”.
Outlook & Valuation: We assign Buy rating to GSPL with a target price of Rs98 based
on SOTP valuation (implying one-year forward 10.2xPE and 1.6xP/BV).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Earnings Hedged, it is Repository of Immense Value
Gujarat State Petronet (GSPL) is the top pick in our gas sector coverage
universe due to the following reasons: (1) Earnings fairly protected despite
fall in Krishna Godavari Basin-D6 gas block’s output, (2) It is a direct play on
softening spot RLNG prices, (3) Gas transmission volume bottoming out in
3QFY12 with assured supply of one cargo shipment per month, and (4) The
company graduating from a regional transmitter of gas to a pan-India player
soon. We believe the market is focusing on near-term earnings, ignoring
long-term value creation. We assign Buy rating to GSPL with a TP of Rs98.
Stock trading ~25% below fair value: We have valued GSPL on SOTP basis with
Gujarat transmission business valued at Rs112, investment in city gas distribution
(CGD) at 15x at Rs12.34 and the new pipelines at (-)Rs16.35 to arrive at a fair value of
Rs98. We have valued the new pipelines at the stated levelised tariff with capacity
utilisation conservatively kept at 30%/40%/50% in the initial three years of operations,
respectively.
Market overestimating downside from final Gujarat tariff: We have assumed tariff
of Rs840/Rs800/Rs790/tscm for FY12E/13E/14E, respectively. The current stock price
implies that Gujarat final tariff would stabilise at Rs715/tscm from FY14E.
Stake in fast growing CGD space: GSPL holds a stake in one of the fastest growing
CGD businesses in India in Gujarat. It holds ~36.59% stake in GSPC Gas and 13.75%
stake in Sabarmati Gas. GSPC Gas has witnessed volume CAGR of more than 200%
over FY07-11, despite sourcing gas supplies entirely from overseas.
Declining volume to stabilise soon; softening LNG prices to boost volume: We
estimate volumes to average 34.90/36.75/38.5mmscmd in FY12E/13E/14E,
respectively. LNG prices have been softening since November 2011 and we expect
volume growth to pick up, driven largely by users in power and refining sectors like
Torrent Power, Essar Oil etc.
Most predictable earnings stream compared to peers: GSPL derives its entire
income from regulated gas transmission business unlike other players in the chain
(GAIL, Petronet LNG, Indraprastha Gas, Gujarat Gas) whose earnings also depend on
cyclical factors. GAIL faces the twin overhang of subsidy burden and marketing margin
limit, while the rest of the companies excluding GSPL face the proverbial “unknown
unknown” on marketing margin. Though GSPL faces tariff overhangs, we believe the
same is already discounted in its share price and is treated as “known unknown”.
Outlook & Valuation: We assign Buy rating to GSPL with a target price of Rs98 based
on SOTP valuation (implying one-year forward 10.2xPE and 1.6xP/BV).
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