GSPL - Motilal Oswal

GSPL (gas transporter) (GUJS IN, M Cap: US$1.4b, CMP: Rs110, U/R)

- Robust volume growth likely: GSPL expects volume growth of 15-20% over the next 2-3 years if supported by adequate supply. Incremental volumes would come from Petronet LNG's Dahej terminal and KG-D6. However, due to RIL's slow ramp-up from the current 60mmscmd, the company has concerns on near-term volume growth.

- Awaiting network authorization from PNGRB: GSPL has applied for authorization of its network to PNGRB and expects formal authorization in the next few weeks. Post authorization, it will apply for tariff determination. GSPL mentioned that it will apply for a single tariff (which then will be applicable in zonal form) for its entire Gujarat network and maintained the stand that the tariff is unlikely to go below Rs750/mscm. GSPL's average tariff in FY10 was Rs850/mscm.

- To spend Rs5b-7b annually: The company operates a pipeline network of 1,900km currently and expects it to be 2,400km by FY11. It plans to further augment its network length and capacity by spending Rs5b-7b every year.

- New growth avenues: Through its JV with BPCL, HPCL and IOC (52% stake), GSPL has submitted bids for Mallvaram-Bhilwara and Mehsana-Bhatinda pipelines. These bids are likely to be opened in September-October 2010 (indicated by PNGRB as well). The cost of the pipelines would be Rs45b-50b each and it may take three years for commissioning. Other bidders are GAIL and the Adani-Welspun consortium.

- Views on LNG pricing: The company believes that there is demand for 30-40mmscmd of LNG, provided there is visibility on pricing for at least five years. There are enough customers in Gujarat to absorb the gas growth rate of 15-20%. Currently, LNG is available at US$7/mmbtu only on short-term basis, but long-term contracts are at higher prices.

- Triggers: (1) Results of bidding round to be conducted by PNGRB in September-October for two pipelines, (2) Tariff determination and approval of GSPL's existing network.

Valuation and view: We build gas volumes of 39/44mmscmd in FY11/FY12 as against current volumes of 39mmscmd. Though the management is guiding a tariff of Rs750/mscm, our calculations indicate a significant decline in the tariff. We believe that tariff is likely to fall to at least Rs650/mscm. Assuming a lower tariff of Rs650/mscm, our SOTP-based price target would stand at Rs90, indicating 20% downside from the current price.

Source : Equity Bulls

Keywords