GSPL - Risk-reward now seems favourable - Centrum

We believe key negatives which led to the stock's underperformance such as subdued transmission volumes and overhang of adverse regulatory tariff order have been captured in the CMP. The stock is likely to be re-rated with expected pick-up in volumes from FY15E and possible bottoming-out of transmission volumes at 22 MMSCMD in FY14E. Although the final outcome on tariffs from the Appellate Tribunal (AT) is awaited, we do not expect negative earning surprises. With annuity-like cash flows, near monopoly business in Gujarat, largest CGD presence and key negatives factored-in, the stock trades at attractive valuations and hence we upgrade to BUY.


Volumes to bounce back from FY15E: GSPL's transmission volumes, with historically 30%+ dependence on RIL KG D6 basin, have been hit due to the severe fall in supplies from the basin. But with the present just 3 MMSMCD supply of RIL KGD6 gas to fertilizer units (which rank highest in priority allocation), downside is limited: we see total volumes at trough levels of 22 MMSCMD for FY14E. We expect volume to rise to 25/31 MMSCMD in FY15E/FY16E, backed by incremental gas flow from GSPC KG basin, Petronet Dahej and Shell Hazira LNG terminal and the recently signed new GTAs for 4 MMSCMD (Essar Oil & OPaL) and further likely GTA of 1-3 MMSCMD. Also, MoP's draft proposal to CCEA in Sep-13 to allow gas price pooling to developers could enable incremental RLNG supplies of 5/8/14 MMSCMD to power sector in FY14E/FY15E/FY16E, not a part of our base estimates.

Tariffs - Negatives factored in: Although the final outcome from the AT is awaited, we believe negative earnings surprises have been factored in. If AT upholds PNGRB tariff order, the status quo remains and a retrospective implementation of the order from FY10 to Q1FY13 could imply incremental revenue of Rs3.4 bn which, after adjustments on System Use Gas (SUG), translates to Rs 1.8bn of pre-tax earnings, which we have not factored in. If AT upholds GSPL's plea, it will increase the levelised tariffs prescribed by PNGRB of Rs23.99/MMBTU for high pressure capacity; and possibly reverse annual SUG cost of Rs0.4- 0.6bn factored-in (FY14-FY16E). Overall in either scenario, it is likely to be earnings positive.

Take or pay capacity charges to peak in FY14E: We estimate (since this is not disclosed by GSPL) take-or-pay volumes of 7.3/8.4/5.3/5.1 MMSCMD and earnings thereon of Rs2.1/2.8/1.8/1.7 bn in FY13/FY14E/FY15E/FY16E respectively. We remain conservative and expect earnings from take-or-pay contracts to taper off once they are re-negotiated in 4QFY14 for FY15.

Valuations and key risks: We arrive at an SOTP-based target price of Rs 63 (0.9x FY16E P/B). We value the standalone business on DCF with WaCC of 11.8% to arrive at Rs 65. Additionally, we apply DCF with a higher WaCC of 15% to arrive at a fair value for inter-state pipelines at Rs (7) and investments in CCG at Rs 6. At the CMP, GSPL trades at PB(x) of 0.8x/0.7x FY15E/FY16E versus historical one year forward P/Bx of 2.0x, which makes it attractive. Key risks to our rating/earnings could be lower transmission volumes; adverse regulatory tariff orders; or lower earnings from take-or-pay contracts.

Source : Equity Bulls

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