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GUJARAT STATE PETRONET LTD (GSPL)
PRICE: RS.108
RECOMMENDATION: REDUCE
TARGET PRICE: RS.118 FY12E P/CEPS: 7.6X
q GSPL is transmitting increased gas through its pipelines on account of
Reliance gas
q Spot LNG and doubling of capacity at Petronet LNG also leading to
growth in volumes
q Committed pipeline expansion from 1666 km currently to ~2000 km by
March 2012
q Submitted EOI for 5675 kms of interstate pipelines
q Maintain FY11 earning estimates with CEPS to Rs.13.5
q Introduce FY12 earning estimates with CEPS of Rs.14.5
q Key risk remain in terms of capping of margins by PNGRB at 18% pre tax
ROCE
q At current rates GSPL is earning more then 20% pre tax ROCE
q Due to limited upside potential and risk to its margins we continue to
recommend REDUCE on GSPL with revised price target of Rs.118 (Rs.115
earlier) based on FY12 earning estimates.
Reliance KG basin gas and Petronet LNG leading to increased volumes
n The KG basin gas of Reliance Industries has started flowing into GSPL pipelines
since Q1 FY10. It is transmitting gas to various industries like fertilizers, power,
city gas distribution, etc. GSPL as has already signed long term contract with Reliance
for transporting 11 MMSCMD of gas and is also transporting ~4.5
MMSCMD of natural gas to Torrent Power. The company is also transporting
additional gas volumes from Shell LNG and Petronet LNG.
n We do not see any gas oversupply situation in Gujarat as it is the country's most
industrialized state and is the largest consumer of natural gas i.e. ~one third of
India's consumption. As per the industry sources the demand for natural gas in
Gujarat is expected to increase from ~60 MMSCMD currently to 100 MMSCMD
in couple of years.
n Thus, we are positive and confident that GSPL would continue to increase the
volume of gas being transported through its pipelines going forward. We expect
GSPL to transport 38 MMSCMD of gas in FY11E which would be ramped up by
13.3% to 43.1 MMSCMD in FY12E.
Committed Pipeline expansion from 1666 km currently to ~2000
km by March 2012
Currently GSPL operats1666 kms of open access natural gas pipelines in Gujarat and
another 370 kms of pipeline are under various stages of execution. Overall there are
committed plans to ramp up the pipeline network from 1666 km as on date to
~2000 km by March 2012. Currently, it is developing 220 km Darod - Jafrabad Pipeline,
40 kms Mundra spur lines, 35 kms Satej to Sanand pipeline for Tata Motors
Nano plant and 75 km Mehsana - Palanpur pipeline.
Key risk remains - margins to be capped at 12%post tax ROCE
n The key risk in GSPL is its pipeline tariffs which were at Rs.777 per TCM in
H1FY11. This is expected to lead to 19.4% pre ROCE for GSPL in FY11E.
n PNGRB has already stated its intent to cap the cross country natural gas pipeline
returns at 12% post tax ROCE or 18.18% pre tax ROCE. However due to lack of
clarity from PNGRB, GSPL continues to charge such high tariffs for transportation
of natural gas through its pipelines. We have assumed only marginal decline in
pipeline tariffs which result in more then 20% pre tax ROCE in FY12E.
n Currently, GSPL is operating in only state of Gujarat and is not covered by this
regulation. However, going forward we do not rule out the possibility that all the
natural gas pipelines in the country would come under PNGRB guidance of maximum
return of 12% post tax ROCE.
n Going forward the major growth in GSPL is expected to come from interstate
pipelines across Gujarat, Rajasthan, Maharashtra and Andhra Pradesh. Thus, its
returns are expected to be capped going forward.
n GSPL has already given EOI for four interstate pipelines amounting to 5675 kms.
Out of these, PNGRB has already invited bids for the first three pipelines. As of
now we have not considered any interstate pipelines in our earning estimates as
we await further details. We have not considered these into our earning estimates
as any new interstate pipeline would take atleast 36 months to commission.
n We believe there is significant risk to GSPL`s pipeline tariffs which would significantly
impact its revenues and profits going forward
Long term value unlocking possible in Sabarmati Gas (SGL) and
GSPC Gas
n SGL, jointly promoted by GSPC group and BPCL, distributes gas in Gandhinagar,
Mehsana and Sabarkantha districts of Gujarat. It supplies CNG to various industries,
households and automobiles. GSPC gas owned by GSPC and GSPL, is presently
doing city gas distribution in Nadiad, Anand and Rajkot districts of Gujarat.
n Both the companies have agreed to merger and thus SGL will merge into GSPC
Gas. This is positive as going forward the combined entity with revenues of
Rs.11.1 bn in FY09 would participate in the various city gas distribution projects
of PNGRB.
n The combined entity has developed extensive pipeline infrastructure and suppliers
piped gas to 92131 domestic customers, 738 industrial customers and 551
commercial customers in 31 cities and at 64 compressed natural gas (CNG) stations
in Gujarat as of September 2009. (Source: GSPC DRHP)
n GSPC Gas is a long term strategic investment for GSPL and thus we can expect
long term value unlocking in the investment going forward.
Maintain FY11 earning estimates
We maintain FY11 earning estimates and expect GSPL to transport 38.0 MMSCMD
of gas with the average realizations of Rs.800 per TCM. Thus for FY11E, we expect
GSPL to report revenues of Rs.11.1 bn, EBIDTA margin of 92.6% and PAT of Rs.4.5
bn. Accordingly, for FY11E, we expect GSPL to report EPS of Rs.8.0 and CEPS of
Rs.13.5.
Introduction of FY12 earning estimates
n For FY12E we expect GSPL to transport 43.1 MMSCMD (up 13.3% YoY) of natural
gas with the average realizations of Rs.753 per TCM (down 5.8% YoY).
n The ramp in volumes is on account of long term contracts with Reliance and
Torrent Power and increased gas supply form Reliance KG basin and Petronet
LNG. However the average realizations are lower due to increased short distance
transportation of gas which typically earns lower gas transmission charges
thereby pulling the averages down. Also we have accounted for certain tariff
reduction which may come form PNGRB.
n For FY12E, we expect GSPL to report revenues of Rs.11.8 bn (up 6.7%), EBIDTA
margin of 91.4% (as against 92.6%) and PAT of Rs.4.8 bn (up 5.9%).
n PAT growth is lower then revenue growth on account of increased depreciation
due to expansion in its pipeline network and lower average realizations.
n Accordingly, for FY12E, we expect GSPL to report EPS of Rs.8.5 (up 5.9% YoY)
and CEPS of Rs.14.5 (up 7.4% YoY).
Price target increased to Rs.118
We continue to value GSPL on DCF method of valuation with 12.6% WACC and
4.0% terminal growth rate (no change). We have shifted the valuation base to FY12
and thus the price target is revised upwards to Rs.118 as against Rs.115 earlier.
Valuation & Recommendation
n At the current market price of Rs.108, the stock is fairly valued at 2.8x book
value, 13.1x earnings and 7.6x cash earnings based on FY12E.
n We feel that GSPL should be looked on P/CEPS basis rather then P/E basis as
GSPL depreciates its pipeline in 12 years as against its economic life of 30 years.
Thus we feel that CEPS is more representative of its true earnings per share.
n We are positive on the long term growth prospect of GSPL due to rising gas demand,
increased gas supply from Reliance and Petronet LNG, expansion of pipelines
and strategic stakes in city gas distribution projects.
n However, due to limited upside potential from the current levels and key risk in
terms of capping of margins by PNGRB, we recommend investors to look for buying
opportunities at lower levels.
n Thus, we continue to recommend REDUCE on GSPL with increased price target
of Rs.118 based on FY12 earning estimat
nicely done
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