Rating: Hold; Target Price: Rs72; CMP: Rs81; Downside: 11.1%
Lower take-or-pay revenues drag earnings; retain Hold
We maintain HOLD rating and revise our price target to Rs72 (Rs69
earlier). GSPL’s earnings were below our and consensus estimates.
Volumes remained flat QoQ, however a 21% sequential downward revision
in take-or-pay revenue in Q4FY14 dragged earnings. A pick-up in
volumes above estimates and clarity on the outcome of tariff petition
remain key triggers for the stock to outperform.
$ Outlook on volumes: During the quarter, GSPL reported volumes in
line with our estimates at 20.8 MMSCMD (flat QoQ and -6% YoY). Volumes
were lower primarily owing to weak demand at high RLNG prices. With
momentary softening of spot RLNG prices, currently volumes have jumped
to 24 MMSCMD and nearly in line with our estimates. We remain
optimistic and factor-in volume of 25/32 MMSCMD in FY15E/FY16E
implying a 23% CAGR in volumes over FY14-16E, backed by incremental
gas flow from GSPC, RIL, ONGC, Petronet Dahej and Shell Hazira LNG
terminal and GTAs of 4 MMSCMD (Essar Oil & OPaL) to be implemented in
FY15.
$ Outlook on tariffs: During the quarter, GSPL reported average
transmission tariff of Rs1.2/SCM (-32% YoY and -6% QoQ). Considering
the challenges in recovering take-or-pay charges related to RIL KG D6
gas supply, we expect earnings from take-or-pay contracts to taper off
from FY15. We estimate (as this was not disclosed by GSPL) take-or-pay
volumes of 8.9/5.3/5.3 MMSCMD and earnings of Rs3.2/1.8/1.8 bn in
FY14/FY15E/FY16E respectively.
$ PNGRB contests higher tariff order given by APTEL in Feb-14: Our
channel checks reveal that PNGRB has contested APTEL’s Feb-14 order on
higher tariff for GSPL’s HP network, in the SC (hearing/proceedings
are yet to commence). However, since we have not factored-in APTEL’s
order, the impact is Neutral. We believe upside risk to our volume
estimate is less probable and that negative earnings surprise from
tariff petition is unlikely. As the matter is subjudice and there is a
precedence of protracted litigation, we await further developments.
$ Valuations and key risks: We arrive at an SOTP-based target price of
Rs 72. We value the standalone business on DCF with WaCC of 11.2% to
arrive at Rs 74. Additionally, we apply DCF with a higher WaCC of 15%
to arrive at a fair value for inter-state pipelines at Rs(7.5).
Investments in CGD at Rs6 have been derived by assigning a P/Bx. Key
risks are (1) changes in volume; (2) changes in tariffs and/or
take-or-pay earnings; and (3) regulatory changes in the form of
revision in tariff norms.
Thanks & Regards
--
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Lower take-or-pay revenues drag earnings; retain Hold
We maintain HOLD rating and revise our price target to Rs72 (Rs69
earlier). GSPL’s earnings were below our and consensus estimates.
Volumes remained flat QoQ, however a 21% sequential downward revision
in take-or-pay revenue in Q4FY14 dragged earnings. A pick-up in
volumes above estimates and clarity on the outcome of tariff petition
remain key triggers for the stock to outperform.
$ Outlook on volumes: During the quarter, GSPL reported volumes in
line with our estimates at 20.8 MMSCMD (flat QoQ and -6% YoY). Volumes
were lower primarily owing to weak demand at high RLNG prices. With
momentary softening of spot RLNG prices, currently volumes have jumped
to 24 MMSCMD and nearly in line with our estimates. We remain
optimistic and factor-in volume of 25/32 MMSCMD in FY15E/FY16E
implying a 23% CAGR in volumes over FY14-16E, backed by incremental
gas flow from GSPC, RIL, ONGC, Petronet Dahej and Shell Hazira LNG
terminal and GTAs of 4 MMSCMD (Essar Oil & OPaL) to be implemented in
FY15.
$ Outlook on tariffs: During the quarter, GSPL reported average
transmission tariff of Rs1.2/SCM (-32% YoY and -6% QoQ). Considering
the challenges in recovering take-or-pay charges related to RIL KG D6
gas supply, we expect earnings from take-or-pay contracts to taper off
from FY15. We estimate (as this was not disclosed by GSPL) take-or-pay
volumes of 8.9/5.3/5.3 MMSCMD and earnings of Rs3.2/1.8/1.8 bn in
FY14/FY15E/FY16E respectively.
$ PNGRB contests higher tariff order given by APTEL in Feb-14: Our
channel checks reveal that PNGRB has contested APTEL’s Feb-14 order on
higher tariff for GSPL’s HP network, in the SC (hearing/proceedings
are yet to commence). However, since we have not factored-in APTEL’s
order, the impact is Neutral. We believe upside risk to our volume
estimate is less probable and that negative earnings surprise from
tariff petition is unlikely. As the matter is subjudice and there is a
precedence of protracted litigation, we await further developments.
$ Valuations and key risks: We arrive at an SOTP-based target price of
Rs 72. We value the standalone business on DCF with WaCC of 11.2% to
arrive at Rs 74. Additionally, we apply DCF with a higher WaCC of 15%
to arrive at a fair value for inter-state pipelines at Rs(7.5).
Investments in CGD at Rs6 have been derived by assigning a P/Bx. Key
risks are (1) changes in volume; (2) changes in tariffs and/or
take-or-pay earnings; and (3) regulatory changes in the form of
revision in tariff norms.
Thanks & Regards
--
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