Stock Pick from Non - Electric Utilities sector

HERE IS WHY

• ·  Increasing use of gas for industrial use in most of the industrial states will benefit GSPL to become a strong                  network
•    Expected debt repayment may improve the profitability of the company 
•    Transmission volumes are very close to bottom and expected to pick-up in near future

Gujarat State Petronet (GSPL) is laying a gas grid to facilitate gas transmission from supply points to demand centres. GSPL has already put in place a pipeline network of about 2,163 kms and further extension of the pipeline network is in progress. Presently, the company transmits over 22 MMSCMD of natural gas.

 The company’s gas grid is equipped with the latest bi-directional gas transmission technology to enable two-way gas flow. This introduces a lot of flexibility into transmission by allowing gas to be sourced or uploaded at either end of the pipeline network. Another innovation is in the open access or contract carrier principle of transmission. This allows any gas transmission company to approach GSPL for permission to use the network on payment of the required charges.

 These facts relating to GSPL’s open access pipeline network in Gujarat attracts our intention before implementation of government’s new gas pricing policy. With two LNG terminals and access to Reliance Industries’ KG basin gas, GSPL is well-placed to derive benefit from increasing usage of gas for industrial use in one of the most industrialized state in the country – Gujarat. Further, the company now has plans to have a pan-India presence by laying three cross country pipelines.

GSPL’s transmission volumes have averaged at 22 MMSCMD in recent years. The current level of transmission volumes are very close to the bottom and can be expected to pick up in the near future, mainly driven by GSPL’s 1.3 MMTPA contract with Petronet LNG. Further, with Indian LNG prices momentarily softening to USD 13 per MMBTU, the industrial demand is expected to revive, particularly for refineries and city gas companies in the near term. In the long run, with the expected approval of the gas price hike, the domestic volume is likely to improve mainly from KG D6, thereby benefitting the company. Additionally, GSPL is also expected to benefit from the incremental gas flow from GSPC, RIL, ONGC, Petronet Dahej and Shell Hazira LNG terminal in FY15.

On the financial front, GSPL’s Q4FY14 PAT of `91.46 crore was down by 26 per cent on yearly basis due to delay in tariff order implementation of hiking network tariff s by 10 per cent. The company’s net debt in March 2014 quarter end was down to `1,037 crore from `1,339 crore in March 13 end-quarter due to debt repayment. Interestingly, the interest costs during Q4FY14 declined further 10 per cent sequentially to `31.90 crore.

Natural gas being a cheaper and cleaner energy option shows tremendous potential in India as compared to oil. Bearing this in mind, GSPL’s strong network in India’s most industrialized state and expected improvement in profitability due to repayment of debt, we are of the opinion that GSPL will be one of the beneficiaries of industrial revival in the country. Hence, we recommend our readers to buy this stock with a target of `115 over one year’s time