GSPL Buy Target Price: Rs84 Upside: 35.3% ::Centrum

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GSPL

Buy

Target Price: Rs84

CMP: Rs62

Upside: 35.3%

Near term worries on volumes persist

Although GSPL reported better than expected numbers with 2.5% sequential jump in PAT during Q4, operational performance was poor with 5.1% sequential drop in transmission volumes. Transmission volumes thus averaged 31.1mmscmd. However, transmission tariffs were 6.3% higher sequentially at Rs956/’000scm on the back of take-or-pay contracts. Decline in RIL KG D6 volumes has been impacting GSPL’s performance of late and volumes are likely to be under pressure in the near term except for some support gained from LNG imports by parent GSPC.

m  Income from take-or-pay contracts sets off lower transmission volumes: Despite lower transmission volumes GSPL’s revenues jumped by 8.0%YoY and 1.2% QoQ perhaps on the back of higher income from take-or-pay contracts. Declining KG D6 volumes led to 12.5% YoY and .1% QoQ decline in transmission volumes at 31.1mmscmd. However, average transmission tariffs remained higher at Rs956/’000scm against Rs790/’000scm in Q4FY11 and Rs899/’000scm in Q3FY12.

m  Interest, depreciation, other income in line: Interest cost faced marginal decline sequentially at Rs316mn due to some repayment of debt. Devoid of significant capitalisation of assets, depreciation jumped marginally on a QoQ basis from Rs460mn in Q3 to Rs466mn in Q4. Other income came 11.1% lower than in Q3 at Rs140mn during Q4. Lower effective tax rate at 32.0% aided PAT to jump by 2.5% QoQ at Rs1.29bn but it declined significantly on a YoY basis from Rs1.51bn.

m  Near term worries on volumes persist yet valuations look attractive; monetization of CGD investments remains a key trigger: Declining KG D6 gas production remains a worry for GSPL’s volume uptick. Yet, parent GSPC is expected to support volume growth in FY13 through higher LNG imports. Without this, volume growth outlook remains bleak. The incremental LNG imports are expected to add about 2.5-3.0mmscmd additional volumes to GSPL. Yet average transmission volume during FY13E is expected to remain flattish on a YoY basis. The company is awaiting tariff notification from the PNGRB regulator. Although valuations look attractive after a steep fall in stock price, we believe monetization of its CGD investments in GSPC Gas and Sabarmati Gas remain key trigger for the stock.  We have reworked our numbers for FY13E and FY14E taking into account lower volumes and tariffs. Based on our new numbers, our target price is lowered at Rs84 (average of DCF TP of Rs89 and PE based TP of Rs79, valuing the stock at 10X FY14E EPS of Rs7.9).

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