Gujarat State Petronet-Concerns over tariff, gas; HOLD : Religare

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Gujarat State Petronet Ltd
Concerns over tariff, gas sourcing; downgrade to HOLD
Gujarat State Petronet (GSPL) reported Q2FY11 net profits of Rs 915mn, down
12.9%QoQ and 16.8%YoY, and below our estimate of Rs 1,055mn. The results
fell short of expectations primarily on account of (a) lower-than-expected sales
volumes of 35.3mmscmd (down 3.7% QoQ and 12% YoY) due to the heavy
monsoons, and (b) higher operating and depreciation costs. We downgrade the
stock from BUY to HOLD given the lack of clarity on tariff revision for existing
pipeline networks, and investment in high-capex inter-regional pipeline networks
with long gestation periods that have limited visibility on the gas sourcing front.
Clarity on revised pipeline tariffs in next two quarters: In the next two months,
GSPL is likely to submit the stipulated data to PNGRB for calculation of tariffs on
existing pipelines. Following data submission, the regulator would take a further
3–4 months to finalise the rates. We have assumed a marginal decline in tariffs to
Rs 750/tcsm versus Rs 783/tscm in Q2FY11.

Expansion of inter-regional network to add little value: As per media sources,
GSPL (52%), in consortium with IOC (26%), HPCL (11%) and BPCL (11%), has
recently won the bids for two interstate pipeline: (a) 1,600km Mallavaram–
Bhilwara, and (b) 1,670km Mehsana–Bhatinda. We believe that these projects
would be ROE-dilutive in nature.

Gas sourcing for new Mallavaram–Bhilwara pipeline doubtful: GSPL’s proposed
42mmscmd pipeline would primarily be dependent on Reliance Industries’ (RIL)
KG-D6 and GSPC’s Deen-Dayal blocks for gas sourcing. RIL’s KG-D6 production is
currently stagnant at 60mmscmd and is likely to reach 80mmscmd in the next 12–
15 months. However, RGTIL’s 80mmscmd East–West pipeline and other upcoming
networks (Kakinada–Chennai, Kakinda–Howrah) are also dependent on KG-D6 gas
and there is little likelihood of GSPL’s new pipeline gaining access to this gas. So,
the only likely source of gas for this pipeline is GSPC’s Deen-Dayal block.
However, even assuming that GSPC is able to deliver gas from Deen-Dayal–West
by June ’12 with a peak production of 5.8mmscmd, it will still be insufficient to
meet the requirement for GSPL’s pipeline.

Mehsana–Bhatinda suffers the same fate: Petronet LNG’s (PLNG) Dahej terminal is
running at ~8mmtpa with potential to go up to 12.5mmtpa in the next 30 months,
but GAIL has the first right of refusal in terms of marketing PLNG’s gas. Other than
this, the only supply source left for GSPL is the 3mmtpa Shell-Hazira LNG terminal.
Downgrade to HOLD: We have downgraded the stock to HOLD based on
(a) tapered earnings growth in FY10-FY13E (4% CAGR), factoring in limited growth
in gas supplies, and b) the ROE-dilutive nature of investment in new projects.