GSPL - Rerating not in the Pipeline - Karvy

GSPL is the only transmission player to have cross connectivity across Gujarat. However, being highly dependent upon RLNG as a source of Natural Gas, the volumes have been lack luster in the last few quarters. We don't expect significant jump in the volumes going forward as the offftake of significant quantity of LNG is unlikely in the near term.

Volumes continue to be under pressure

The transmission volumes have significantly come down from 37 mmscmd to 23 mmscmd as RLNG fails to make up for deficit in RIL KGD6's supply. We expect the volumes to remain under pressure going forward also as they increasingly depend upon RLNG for sourcing and latent demand is not expected to ramp up notably.

Unlikely to benefit from ramp up of new domestic fields

Incremental domestic production is expected to transmit through GAIL pipelines to the existing Power and Fertilizer Producers operating at lower rates. The Core sectors are unlikely to consume RLNG sourced through GSPL. RIL and Essar Refinery in Jamnagar are the only prospective consumers expected to add not more than 3-5 mmscmd to their existing 23 mmscmd in next 2-3 years.

Valuations & Outlook

We expect transmission volumes to increase by 2 and 3 mmscmd in FY14 and FY15 on the back of higher capacity utilization at Shell (from 30% to 100%) and Dahej terminal (from 105 to 120%). However we don't see upsides in the earnings as higher depreciation and interest cost are likely to keep bottomline under pressure and consequently reduce ROEs.

The valuations have reduced from 6x to 4.5x on EV/EBITDA basis as volumes came down from 37 mmscmd to 23 mmsmcd. We don't expect ROEs to improve from the current levels as volumes don't ramp up concurrently to capex. We have arrived at valuation of Rs.62/shr with an EV/EBITDA 4 x FY15E as valuations are unlikely to re rate on lack of volume visibility.

Source : Equity Bulls

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