We recommend ?BUY? on GUJARAT STATE PETRONET LTD for a target of INR 212 – valuing the company at P/E 18x of FY19E Earning.
Investment Rationale:
- GSPL is India?s second largest Natural Gas Infrastructure and Transmission Company.
- Strong balance sheet/ FCF generation to meet debt requirement.
- GSPL – Now integrated play on India?s gas market.
- The Company continues to expand its gas grid to reach new markets and connect to new supply sources.
- The gas grid is equipped with the latest bi-directional gas transmission technology to enable two-way gas flow.
- Flexibility of transmission.
- Another innovation is in the open access or contract carrier principle of transmission.
- GSPL has already put in place a pipeline network of about 2600 km and further extension of pipeline?network is going on.
- Advanced engineering practices that provide efficient Natural Gas Transportation.
- Gujarat Gas: Strong play on 7 minute workout rapidly growing city gas space.
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Valuation and View:?
GSPL (Gujarat State Petronet Ltd), a GSPC Group company is a pioneer in developing energy transportation infrastructure and connecting natural gas supply sources including LNG terminals to growing markets. The company has developed requisite expertise and confidence with proven project management competencies.? We value the business at 18x FY19E EPS and recommend a BUY rating on the stock with a target price of INR 212 per share.
Risk & Concerns
- Safety and Operational Risk: The changing technologies and the natural ageing of existing facilities pose the risk of Pipelines and stations. Aged Pipelines are prone to unplanned shutdowns, increased maintenance and operating costs.
- Affordability and Availability of Natural Gas: Although, the current and future demand for natural gas exceeds supply, the supply of and demand for natural gas is subject to several factors which may adversely affect its operations.
- Regulatory Risk: The evolving nature of regulations in the sector, especially on critical aspects like third party access, CGD netwrok exclusivity as well as with regards to the long pending list of final tariff notification for all major pipeline netwroks in India (including that of your company), pose uncertainties and challenges for all stakeholders.
Company Background
Gujarat State Petronet (GSPL), a group entity of the GSPC group, is currently a Gujarat focused natural gas transmission firm operating on an open access basis. It owns approximately 2,180 km natural gas pipeline transporting ~21 mmscmd of gas. To increase its geographical spread it had participated and won bids to put up 3 major pipelines outside Gujarat (1) Mallavaram (Andhra Pradesh) – Bhilwara (Rajasthan), (2) Mehsana (Gujarat) – Bhatinda (Punjab), and (3) Bhatinda (Punjab) – Srinagar (J&K). GSPL owns stake in two city gas distribution firms ? Sabarmati Gas and Gujarat Gas. It is the second largest gas pipeline player in the country after GAIL.
GSPL faces potential tailwinds, with its gas transmission volumes poised to rise on top priority allocation to city gas distribution. GSPL holds ~25% stake in 2 city gas geographies, which account for one-third of its volume offtake. Its transmission tariff is also likely to increase retrospectively as recently Appelate Tribunal of Electricity has given a favorable verdict to GSPL against PNGRB’s tariff order.
Gujarat State Petronet Limited (GSPL) was set up to complement the efforts of GSPC. While GSPC harnesses and procures natural gas, GSPL is building the infrastructure that transmits the gas across the state of Gujarat and ultimately allows last-mile linkage to the end-user. GSPL is laying a gas grid, to facilitate gas transmission from supply points to demand centres.
GSPL, a GSPC Group company is a pioneer in developing energy transportation infrastructure and connecting natural gas supply sources including LNG terminals to growing markets. GSPL is continuously expanding its pipeline network currently in Gujarat to reach the demand centres by laying gas pipeline network. The company has developed requisite expertise and confidence with proven project management competencies.
Industry Overview
Energy plays a pivotal role in economic growth of a country. Sustainable development and inclusive growth of the overall economy requires adequate, affordable and reliable energy. India is at present one of the fastest growing large economy of the world, with its share in global primary energy consumption pegged at 5.5%1 in 2016, surpassing Russia to become the world?s third largest energy consumer. Rising income, population growth and urbanization are breaking ground to harness huge potential for energy demand in India, which is home to about a fifth of the world?s population, but uses only about 6% of the world?s energy.
Government of India (GoI) has launched several incentivizing policy reforms including giving marketing and pricing freedom for gas to be produced from High Pressure-High Temperature, Deepwater and Ultra Deepwater Areas, Coal Bed Methane (CBM) blocks and Marginal Fields, a move which is likely to improve domestic gas production in the next 5 years timeframe. This would also ensure in achieving the vision of the Hon?ble Prime Minister of India of reducing the import dependence in energy sector by 10% by 2022.
