GSPL -Stagnant volumes.:: Kotak Sec,

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GSPL (GUJS)
Energy
Stagnant volumes. GSPL reported 2QFY11 net income at `915 mn (-13% qoq, -17%
yoy) versus our estimate of `978 mn with gas transmission volumes at 35.3 mcm/d
(versus 36.3 mcm/d in 1QFY11) and transmission tariffs at `0.78/cu m (versus `0.77/cu
m in 1QFY11). We maintain our SELL rating on the stock with a revised target price of
`87 noting (1) it is trading 36% above our 12-month target price, (2) downside risks to
volumes and (3) concerns about the sustainability of GSPL’s transportation tariffs.


2QFY11 results highlights—lower-than-expected profits; sustainability of tariffs is an issue
GSPL reported 2QFY11 EBITDA at `2.34 bn (-3% qoq and -4.4% yoy) in line with our estimate of
`2.36 bn. The yoy decline in EBITDA despite 13.7% higher gas transmission volumes reflects lower
gas transmission charges at `0.78/cu m versus `0.89/cu m in 2QFY10. We have concerns on the
sustainability of GSPL’s current tariffs given that these will be likely be lower once GSPL is brought
under the purview of regulations for long-distance gas transportation pipelines. We find the
current tariff too high since it translates into an estimated pre-tax ROCE of 25% based on 1HFY11
data versus 18% allowed returns; tariffs will likely decline assuming higher volumes.
`111 bn capex planned for new pipelines; concerns on gas supply and return on investment
GSPL has planned a capital expenditure of `111 bn for two new cross-country pipelines awarded
by the Petroleum and Natural Gas Regulatory Board (PNGRB) to a consortium which includes IOCL
(26%), BPCL (11%) and HPCL (11%)—(1) Mallavaram-Vijapur-Bhilwara (MVB) pipeline and (2)
Mehsana-Bhatinda (MB) pipeline. However, we have concerns on the availability of gas for these
pipelines, which may lead to extremely low capacity utilization for several years. Our concerns have
been exacerbated by the DGH’s rejection of appraisal plans for DD-North, DD-East and DDWDownthrown
zones in GSPC’s KG-OSN-2001/3 block due to a delay in submission of data.
Maintain SELL; stock discounting best-case scenario
We reiterate our SELL rating on GSPL given (1) potential 26% downside to our revised 12-month
target price of `87 (`83 previously), (2) lack of positive triggers and (3) potential downside from
cut in GSPL’s transportation tariffs for its existing network. We believe the current price is already
discounting a scenario of no reduction in tariffs from current levels. Our current fair valuation of
the stock comes to `116 in a scenario of 2QFY11 tariffs of `0.78/cu m sustaining in perpetuity.
Fine-tuned EPS estimates
We have revised FY2011E, FY2012E and FY2013E EPS to `7.3, `8.1 and `9.1 from `7.1, `8 and
`8.9 to reflect (1) lower gas transmission volumes, (2) higher transmission tariffs and (3) 2QFY11
results. We model gas transmission volumes for FY2011E, FY2012E and FY2013E at 37.3 mcm/d,
47.1 mcm/d and 53.6 mcm/d, respectively, versus 35.8 mcm/d in 1HFY11.