Management Interaction Takeaways
GSPL
Neutral
Target Price: Rs74.7
CMP: Rs75.8
Downside: 1.4%
We have recently interacted with the management of GSPL to get their feedback on the applicability of tariffs by PNGRB regulator and current business environment. The key highlights are:
m Tariffs by PNGRB regulator – The company has not yet received the details on zonal tariffs and hence hasn’t applied it to the existing consumers. The management believes that there will not be any negative impact due to the tariff revision as notified by the regulator.
m System use of Gas (SUG) – PNGRB has asked the company to return the cost of SUG to the customers as gas consumed should attract tariffs and needs to be considered as operating expense. Concurrently, the company should recover this from the customer either in cash or kind. The company has approached the appellate tribunal for resolving this issue and the decision is expected soon.
m Monetization of CGD businesses – GSPL holds 36.5% in GSPC Gas and 13.8% in Sabarmati Gas which are city gas distribution (CGD) companies operating in the state of Gujarat. GSPC Gas is currently the largest CGD company in India with distribution volumes of over 4.3mmscmd supplying to more than 390,000 domestic customers, 1,500 commercial and non-commercial customers and 1,700 industrial customers. The company also operates 146 CNG stations catering to over 80,000 vehicles. Sabarmati Gas distributes over 0.8mmscmd to more than 60,000 domestic customers, 320 commercial customers and 200 industrial customers. It operates 23 CNG stations in the state of Gujarat. We believe monetization of the CGD businesses which have grown to a sizable level would be a key catalyst in the near term.
m Volume in Q3 – GSPL’s transmission volumes stood at 28.6mmscmd during Q2 and the company is likely to clock slightly lower run rate in Q3. We believe the shortfall due to KG D6 decline would be met through transmission of spot LNG. Tariffs are likely to remain at about Rs975/’000scm thus maintaining the profitability.
m Valuations – We believe GSPL’s transmission volumes are likely to stagnate over the next few quarters due to non-availability of incremental natural gas from domestic sources or from the LNG route. The earnings would stagnate too. However, we believe the monetization of CGD businesses could be a key trigger for the stock in the near to medium term. We have valued GSPL using average of P/E and DCF with a target price of Rs75. Maintain ‘Neutral’.
m System use of Gas (SUG) – PNGRB has asked the company to return the cost of SUG to the customers as gas consumed should attract tariffs and needs to be considered as operating expense. Concurrently, the company should recover this from the customer either in cash or kind. The company has approached the appellate tribunal for resolving this issue and the decision is expected soon.
m Monetization of CGD businesses – GSPL holds 36.5% in GSPC Gas and 13.8% in Sabarmati Gas which are city gas distribution (CGD) companies operating in the state of Gujarat. GSPC Gas is currently the largest CGD company in India with distribution volumes of over 4.3mmscmd supplying to more than 390,000 domestic customers, 1,500 commercial and non-commercial customers and 1,700 industrial customers. The company also operates 146 CNG stations catering to over 80,000 vehicles. Sabarmati Gas distributes over 0.8mmscmd to more than 60,000 domestic customers, 320 commercial customers and 200 industrial customers. It operates 23 CNG stations in the state of Gujarat. We believe monetization of the CGD businesses which have grown to a sizable level would be a key catalyst in the near term.
m Volume in Q3 – GSPL’s transmission volumes stood at 28.6mmscmd during Q2 and the company is likely to clock slightly lower run rate in Q3. We believe the shortfall due to KG D6 decline would be met through transmission of spot LNG. Tariffs are likely to remain at about Rs975/’000scm thus maintaining the profitability.
m Valuations – We believe GSPL’s transmission volumes are likely to stagnate over the next few quarters due to non-availability of incremental natural gas from domestic sources or from the LNG route. The earnings would stagnate too. However, we believe the monetization of CGD businesses could be a key trigger for the stock in the near to medium term. We have valued GSPL using average of P/E and DCF with a target price of Rs75. Maintain ‘Neutral’.
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