Maintain 'reduce' on GSPL – TP Rs.68 - Geojit BNP Paribas Financial Services

- Demand for gas from the gas based power units in Gujarat is declining as indicated by the fall in PLF (plant load factor). It declined from 48% in December 2011 to 44% in March 2012.

- Petronet LNG reported 30% qoq drop in tolling volume, which indicate that GSPL's spot LNG volume is unlikely to improve to compensate the decline in power demand.

- After 3QFY12 result, the company had indicated that weak demand from power, refinery and steel segments resulted in contraction of volume by 7% qoq. Power demand declined further until March 2012 and no sign of a rebound in utilization is seen in the steel sector.

- However, the restart of Vadinar refinery units post expansion may offset a steep decline in volume.

- At the target price of Rs.68, the upside potential from the current level (Rs.63.70) is only 6.8% and hence 'reduce' rating is maintained on the stock. The target price does not consider upside potential from cross – country projects as clarity on the project schedule and supply schedule are awaited.

- Tariff overhang remains on the stock apart from lack of volume growth because gas demand from the power sector continues to decline and demand from other segments is inadequate to compensate the decline.

- It is expected that volume CAGR is likely to decline by 4% over FY11-FY14.

- Higher than expected volume growth and lower than expected tariff cut will be the upside risk on the target price.

Source : Equity Bulls

Keywords