GSPL - Tariff risk behind us now - IIFL

In September 2012, PNGRB issued authorization for GSPL's pipelines and implemented a 12.5% cut for its tariffs, which was in line with expectations. PNGRB has disallowed charging the customers/shippers for the system use gas (used for running heating system/compressors) which forms 0.3% of the total throughput. This was a key overhang, which is now behind us. The focus is now shifted to volume growth.

Volume growth... near term risks long term strength

GSPL has seen a steady fall in its transmission volumes on the back of declining gas production at RIL's KG-D6 field. Some portion of that has been compensated with increased throughput at Petronet's Dahej terminal. Going ahead, KG-D6 volumes are not expected to recover before FY15 but LNG volumes are expected to rise from Dahej and Kochi terminals of Petronet. Over the longer term, commencement of production from new conventional fields, CBM fields and addition to LNG capacities will keep supplies robust.

Expansion in and beyond Gujarat

While gas supplies should increase in Gujarat, demand too is on a rise especially from the industrial sector. To service this demand, GSPL is building additional pipelines in the state, which include Tana-Amreli, Mehsana-Palanpur, Nano connectivity pipeline and Sterling SEZ pipelines among others. GSPL led consortium (52% GSPL stake) has won bids for building cross country pipelines (cumulative length 4,039km) enabling it to expand its operations beyond Gujarat. These pipelines will be connected to the existing gas grid in Gujarat (primarily operated by GSPL). We expect these pipelines to substantially contribute to GSPL's topline beyond FY15.

Attractive valuations

In spite of a decline in volumes, no material reduction has been seen in revenues and profitability of GSPL owing to take-or-pay nature of its contracts. While the same will be true when volume recovers, we see GSPL as one of the best plays on long-term gas growth story in India. The stock trades at attractive valuations (P/E) of 6.8x based on FY15E EPS of Rs9.8.

Source : Equity Bulls

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