Gujarat State Petronet - Stepping On The Gas
By Prasanna Bidkar |
11/7/2011 10:13 AM Monday
Gujarat State Petronet (GSPL), which operates an extensive gas transmission network of 1874 km in Gujarat, seems to be a good long-term buy. An expected increase in transmission volumes, widening of its geographic footprint, no expected downside on transmission tariffs from the current levels and a good dividend payment history are some factors in the stock's favour.
On the valuations front too, the company seems to be on a better footing. At its current price of Rs 98.50, the stock trades at around 11x its trailing 12-month earnings. This is at a discount to a bigger gas transmission and marketing major like GAIL, which is trading at 15x, and also to the 19x of Petronet LNG. The scrip is also trading at a discount to its own historic valuation levels of around 13-14x.
By virtue of its extensive network in Gujarat as also its expansion plans, GSPL is well-positioned to capitalise on the favourable gas demand dynamics. Given the cost advantage of natural gas over other alternative modes of fuel for end-users, it is likely that gas, if not available in adequate quantity from domestic sources, will be imported in the form of re-gasified liquefied natural gas. A further ramp-up in capacity of existing LNG facilities, and the setting up new ones, such as those at Kochi, should translate into an increased availability of gas in the years ahead. There are also expectations of increased domestic gas availability in the future, when the KG basin fields owned by ONGC and GSPC commence production, and Reliance Industries ramps up its production. This will make GSPL a national player, and will result in increased volumes for the company.
GSPL currently has 1874 km of pipeline, and is in a further expansion mode. The company is in the process of increasing its network in Gujarat to around 2500 km. Further, the GSPL-led consortium (in which GSPL has a 52 per cent stake) has also received authorisation from the Petroleum and Natural Gas Regulatory Board (PNGRB) for the construction of three cross-country gas pipelines. The Mallavaram-Bhilwara, Mehsana-Bhatinda and Bhatinda-Srinagar pipelines involve laying around 4000 km of pipeline, at a cost of around Rs 12500 crore. GSPL’s equity contribution to this will be Rs 2100 crore, and it is confident of earning over 15 per cent equity IRR on these new pipelines. The lower capex of these pipelines, as compared to the existing competing pipelines, should help earn a higher IRR despite lower tariffs. These pipelines are to be commissioned by July 2014, resulting in a capacity of around 125 mmscmd, a significant volume growth from the current levels of around 36 mmscmd. Increased depreciation and interest cost due to these expansion initiatives could put some pressure on the margins in the near term. However, this is expected to be value-accretive in the long-term. Expansion outside Gujarat will also help de-risk the company’s business to some extent.
Another factor to be considered is that the transmission tariff is not expected to fall drastically. The management does not expect tariffs to fall from the current rate of Rs 0.80 per standard cubic metre (scm).
On the financial front, the company has performed well in the past. In FY11, the company posted a topline of Rs 1046.52 crore and a bottomline of Rs 506.38 crore, as against Rs 1000.87 crore and Rs 413.77 crore respectively. It carried this growth momentum forward in Q1 FY12 as well. The consistent dividend payment history also provides solace. In view of these factors, we recommend that investors buy the scrip with a target price of Rs 125.
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