In its recent order, PNGRB has cut the tariff for GSPL’s high-pressure pipelines by 12.5% (INR 23.99/mmbtu from INR 27.41/mmbtu) effective November 20, 2008. GSPL was charging INR 1.02/scm as tariff for high pressure pipelines while the new tariff has been fixed at INR 0.895/scm. High pressure pipelines at 2,890 kms form major chunk of GSPL’s total pipeline. The tariff is yet to be out for the Low-pressure pipeline of 660 kms. The regulator has asked GSPL to refund the excess charges (since November 2008) to the customers. The tariff cut is in line with our estimates. We are neutral on this development as the one-time impact on profits will be negated by higher valuation multiples due to removal of overhang of tariff cuts. Maintain HOLD.
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One time impact: Assuming same level of cuts for low pressure pipelines (12.48%), we estimate one time hit on PAT to be INR 2.97 bn (GSPL reported transportation revenues of ~INR35.70bn during December 2008-June 2012), implying one time negative EPS impact of INR 5.3/share.
Impact on profits: By reducing Q1FY13 transportation revenues by 12.5%, profits are impacted by INR 211 mn, bringing the Q1FY13 adjusted EPS to INR 1.93/share. Annualised earnings then come to INR 7.7/share. The tariff cut is in line with our assumptions and thus we maintain our FY14 EPS at INR 7.3/share (lower than consensus EPS of INR 8.4/share). For FY13, due to one-time impact, reported FY13E PAT will be negatively impacted by INR 4.9/share. We expect core and reported FY13e EPS at INR 7.5/share and INR 2.6/share, respectively. (Current consensus EPS estimates is INR 8.3/share)
Outlook and Valuations: Overhang disappears, ‘HOLD’
We had earlier assigned EV/EBITDA multiple of 6.5x, a discount to GAIL’s EV/EBITDA of 7.0x, due to the overhang of tariff cuts. However, with the PNGRB order out now, we believe that the company will trade at higher multiples. Thus we have now assigned a 7.0x EV/EBITDA multiple. This leads to increase in target price by INR5-6/share. This positive impact will be offset by the one-time tariff refund to customers which we estimate to dent its target price negatively by INR5/share. Therefore, we maintain GSPL’s target price at INR 83/share as well as our ‘HOLD’ recommendation.
Regards,
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