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Tariff woes
Near stagnation in domestic gas production will increase India’s dependence on
LNG and supply share of new regas terminals situated outside Gujarat will rise.
This will lead to moderation in FY12-13 volume growth of GSPL after 2 very strong
years. Moreover, our reading of regulations and recent tariff orders suggest a
strong likelihood of a sharp cut in GSPL’s transmission tariffs from FY11 levels as it
comes under the purview of PNGRB. This is likely to be a significant negative
surprise for consensus. We initiate as U-PF with a target price of Rs87/sh (-14%).
Limited near term Indian gas supply growth to impact GSPL’s volume growth
As in the past, Indian gas consumption will remain constrained by supply. The ramp up
problems at Reliance’s KGD6 field will lead to a short term dip in domestic production.
Therefore, near term supply growth will be solely dependent on short term LNG (LNG
proportion in supply will rise to 30% by FY13 from 18% in FY11) as new regas
terminals are commissioned outside Gujarat. After 2 years of strong growth driven by
supply from KGD6, these factors will lead to a marked moderation in volume growth
for Gujarat based GSPL- India’s only listed pure play gas transmission company.
Sharp 15% cut in transmission tariff also likely; FY12 PAT to fall by 22%YoY
Based on our reading of regulations, recent tariff orders for Gail’s pipelines and despite
arguably lenient tariff determination assumptions on incremental capex (25% of gross
block) and opex (20% above 7 year average), GSPL’s gas transportation tariff should
drop by a sharp 15% to Rs670/mscm from FY11 level (Rs788/scm) as its pipelines
come under purview of PNGRB. This combination of moderate 4%YoY volume growth
and lower tariff will result in 11%/13%/22%YoY decline in FY12 revenue/EBITDA/PAT.
Unattractive economics of new pipelines but CGD investments are valuable
While 3 new inter-state gas pipelines have been awarded to GSPL’s consortium will
make it a national player, limited near term growth in supply, overlapping areas with
existing pipelines, coverage of areas with unproven gas demand as well as likelihood of
aggressive bidding make these projects challenging. Nonetheless, we include their DCF
value of Rs7/sh in our target. We are more enthused by GSPL’s equity stake in city gas
companies (GSPC and Sabarmati Gas) and estimate a peer based value of Rs13/sh.
Initiate with U-PF due to unfavourable risk reward
Consensus estimates reveal that as guided by GSPL’s management a tariff cut is not
being widely expected. Hence, news flow around possibility of tariff cut (likely by
2HFY12) should be a negative surprise. Strong stock performance over last 18 months
coincided with smart growth in volumes. Moderation in volume growth may deprive the
stock from this important positive trigger. Moreover, the stock is trading within 3% of
our no tariff cut value (Rs105/sh). We initiate on GSPL with an end FY12 target price
of Rs87/share (-15%, Rs67 for existing network @ tariff of Rs670/mscm, Rs13 on CGD
stake+ Rs7 for new pipelines) and U-PF rating due to its unfavourable risk-reward.
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