Softening of RLNG prices will revival industrial gas demand…. Gujarat State Petronet :: Kotak Sec

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GSPL
Recommendation ACCUMULATE	Target Price Rs. 124

Softening of RLNG prices will revival industrial gas demand….

We expect Gujarat State Petronet's earning to improve on account of both

higher gas volumes and recent upward revision in gas transmission tariffs.

Softening of LNG prices will revive demand in Industrial and power sector,

we opine. Currently, RLNG accounts for ~85% of GSPL's total transmission

volumes. We recommend ACCUMULATE (earlier BUY) on GSPL with a revised

target price of Rs. 124/Share (Rs.109 earlier), given reasonable valuations at

10.7x PE based on FY2016E earnings.

Key Arguments

 Fall in RLNG prices along with crude oil prices is meaningfully positive

for GSPL

Asian liquefied natural gas (LNG) prices have fallen to its lowest level in nearly

four years despite strong winters mainly due to strong additional LNG supply and

stagnant LNG demand from Japan and South Korea (region's largest buyers).

LNG prices have fallen below $10 per million British thermal units along with fall

in crude oil prices. Just to highlight, ~176 million metric tons (MMT) of LNG is

bought and consumed in Asia out of the total traded ~235 MMTPA LNG, globally.

In 2015, major new LNG supplier will be Australia, which is expected to add LNG

supplies from at least three new projects Chevron Corp.'s Gorgon project, Santos

Ltd.'s Gladstone project and Origin Energy Ltd.'s Australia Pacific LNG project.

This can put further pressure on the LNG prices unless demand revives. Further,

two of Japan's nuclear power reactors are expected to restart in 2015, further

lowering LNG demand. Other countries including India, China and Thailand have

been purchasing LNG at low prices. We believe GSPL to benefit meaningfully

with lower LNG prices. Currently, re-gassified LNG constitutes ~85% of its total

volumes.

 Gas transmission volume revival

In H1FY14, GSPL's gas transmission volume increased by 7% to 4,250 MMSCM

(i.e. 23.23 mmscmd) due to softening of RLNG prices and industrial demand revival.

In H2FY15, we expect the gas demand to increase further due to further

softening of prices and revival in industrial activity. We expect GSPL to transport

~23.39 MMSCMD of natural gas in FY15E and ~26 MMSCMD in FY16E. In

2015, gas transmission growth is expected from ONGC Petro-additions Limited

(OPaL) (~1.2 mmscmd) and Essar Oil (~1.1 mmscmd) amounting to ~2.3

mmscmd, with take or pay clauses.

Further, gas price pooling proposal, if implemented, can add 4.5-6.5 mmscmd to

Gujarat state gas supplies and lead to considerable volume growth for GSPL.

Valuation & Recommendation

We expect GSPL to report an EPS of Rs.8.8 and cash EPS of Rs.12.3 for FY15E and

similarly an EPS of Rs.10.6 and cash EPS of Rs.14.3 for FY16E. We recommend

ACCUMULATE on GSPL with a revised target price of Rs. 124/Share (Rs.109 earlier),

given inexpensive valuations at 10.7x PE based on FY2016E earnings.

LINK

http://www.kotaksecurities.com/pdf/pdfs/FUNDGSPL05012015095157.pdf