Gujarat State Petronet
Low risk, high growth
The company offers low risk bet on opportunities thrown up by almost doubling of gas supplies in India over the next two years.
| Buy | Gujarat State Petronet |
| BSE Code | 532702 |
| NSE Code | GSPL |
| Bloomberg | GUJS@IN |
| Reuter | GSPT.BO |
| 52-week High/Low | Rs 114 / Rs 50 |
| Current Price | Rs 66 (as on 28th May 2008) |
Inadequate gas supply has constrained growth of gas consumption in India. There is large unmet demand for gas with several existing users not getting enough gas and several potential consumers not getting any gas. As the natural gas supply in India is expected to almost double in the next couple of years, the Indian natural gas sector has become an attractive investment avanue. Since the demand is supply and infrastructure driven, there is huge potential across the gas value chain at the upstream, transmission and distribution sectors.
Low risk, high growth
The transmission segment has the lowest business risk in the gas value chain. This is due to negligible price risk and absence of competition due to natural monopoly. This makes the companies operating in this segment very attractive. One such company is Gujarat State Petronet (GSPL) which offers its transmission network in Gujarat on open access basis. It offers the best visibility among listed gas transmission utilities on volume growth based on already tied up contracts
Currently GSPL’s pipeline capacity is 40 mmscmd, but it carries less than 20 mmscmd due to non availability of gas. However, as the gas supply in India is likely to double over the next couple of years and Gujarat being one of the most gas conscious state, gas transported through GSPL will almost double over the next two years. This makes GSPL one of the best picks in the Indian gas utilities space, being most highly levered to increasing and visible domestic gas supplies.
GSPL is a gas transmission company with a network of pipelines in the western Indian state of Gujarat. It has a gas transmission network comprising over 1,100 kms of pipeline connecting Hazira, Vadodara, Ahmedabad, Kalol, Himmatnagar, Mehsana, Rajkot, and Vapi. GSPL's network connects all major supply sources in Gujarat to important consumption centres in the state and transports 18-19 mmscmd of gas.
Reliance Industries’ commencement of supply of KG Basin gas will be a major booster
Reliance Industries (RIL) has signed 15 year agreement with GSPL to transport 11mmscmd of gas in Gujarat from mid-2008. RIL is expected to start the supply of KG Basin gas during the second half of calendar year 2008 which will be initially of 40 mmscmd of gas which can be increased to 80 mmscmd at peak level (thus doubling the gas production in India from around 80 mmscmd in FY 2008 to around 160 mmscmd by FY 2010), within one year from the date of commercial production.
The transmission pipelines are set to be utilized much more efficiently with RIL commencing the production of natural gas in KG basin by second half of FY09. The idle capacity is to be brought to use with GSPL carrying 11-20-mmscmd of RIL gas in Gujarat for RIL’s captive use as well as for other consumers The existing pipeline grid itself would suffice for transmission of the additional gas from RIL.
GSPCL’s gas supply ensures GSPL’s long term growth
GSPL’s parent Gujarat State Petroleum Corporation (GSPCL) has made a large gas discovery in the KG basin. GSPCL is set to start gas production from KG basin after FY 2010, which could boost GSPL’s volumes by further 10-15 mmscmd.
There is scope for further accretion of reserves as GSPCL has several other exploration blocks in highly prospective basins. GSPC has 26 exploration blocks allotted under the NELP regime with 10-80% interest. Of its 26 NELP blocks six are in the highly prospective KG basin. Six other blocks are in the eastern offshore region in the Cauvery and Palar basin to the south of the KG basin. It also 12 other blocks in basins like Mumbai offshore, Cambay and Rajasthan, where commercial oil and gas discoveries have been made. It also has 11 pre-NELP blocks.
GSPL to gain from GSPCL’s role as gas aggregator in Gujarat
GSPCL, besides being a gas producer, is emerging as a gas aggregator in Gujarat, too. GSPL gets to transport most of the gas GSPC has marketing rights to. GSPC has a pool of 16 mmscmd of gas of which GSPL transport 15.5 mmscmd. Thus most additional imported LNG supplies are and will be routed through GSPL.
Gujarat to remain and will continue to remain the most favoured destination for gas supplies
Gujarat is the largest gas consumer and accounts for 30% of India’s gas consumption currently. This is because a large part of Indian gas production lands up in Gujarat either to be consumed or for onward transportation to northern India. Over 80% of India’s current gas production is produced in Gujarat onshore and Mumbai offshore region. A large part of Mumbai offshore lands up at Hazira in Gujarat and then is transported out of the state by the HVJ pipeline. Another reason is that both the operating LNG import terminals in India are located in Gujarat. Moreover, Gujarat is one of the most industrialized states in India and therefore has large gas demand.
Gujarat’s share in gas consumption to remain high atleast for the next 3-4 years
Most of the incremental gas production in India will come from the eastern offshore region. Gujarat will however continue to retain a share of 30% in Indian gas consumption even in FY12. There are large gas consumers like NTPC and RIL in Gujarat. This is because a significant portion of the gas produced in the eastern offshore region will get transported to Gujarat.
GSPL has 1,130 km of trunk and spur transmission network with a transportation capacity of 40-50 mmscmd. All the pipelines of GSPL are bidirectional, implying that in these pipelines can be used to transport gas in either direction. The flexibility such a network provides is likely to prove useful in future as gas flows into Gujarat from multiple sources. It also offers the best pipeline connectivity in Gujarat.
Capacity expansion to continue
GSPL is all set to expand its pipeline from 1,180 km to 2,000 km. The extension plan of another 800-900 km of pipeline will be operational in different phases by FY2010. The pipeline will connect to Pipavav port in South Gujarat and will extend to Mundra in West Gujarat. Further, the Company is developing several spur lines to connect Industrial clusters and medium size customers along the pipeline network. The Company has taken up development of spur lines in Vapi, Morbi, Mehsana and Baroda regions on priority basis. The company is likely to invest Rs 1100 crore by FY 2010 on extending its network.
Strategic stakes to add value
The Company has aquired strategic stakes in Krishna Godavari Gas Network Limited (planning to develop gas transmission & CGD (Compressed Gas Distribution) network in Andhra Pradesh), GSPC Gas Company Limited and Sabarmati Gas Limited which are developing CGD Network in the State of Gujarat. Increased availability of gas for automobiles in Andhara Pradesh as well as Gujarat will boost the business prospects of these subsidiaries/
CEPS is more representative of its per share profits
GSPL uses aggressive depreciation policy whereby it depreciates pipelines over just 12 years (8.33% rate) as against their economic life of 30 years. GSPL’s peer GAIL has started depreciating pipelines at just 3.17% (30 years economic life) since FY06. If GSPL were to use this then its earnings would be much higher than reported.
On the one hand the company is investing aggressively to prepare itself for gas expected in the long run from GSPCL as well as imported LNG, it is depreciating the pipelines at accelerated rate explained above. As a result depreciation burden is increasing at an accelerated rate without any connection with the volumes being transported. To give an example most of the investments made for RIL gas has been implemented and consequent deprecation has already started in FY 2008, when the RIL gas will ramp up only in the later part of FY 2009.
Due to the company's policy of advance investment and accelerated depreciation, CEPS (cash earning per share) is more representative of its per share profits instead of EPS.
In FY 2008, we expect GSPL to register EPS of Rs 1.5. However, it is likely to report CEPS of Rs 4.4 for FY 2008. EPS and CEPS are expected to rise to Rs 2.1 and Rs 5.9 respectively in FY 2009. They are further likely to appreciate to Rs 3.6 and Rs 8.7 respectively in FY 2010.
The share price trades at Rs 66 (52-week High Low: Rs 50/Rs 114). While the Price / CEPS works out to 15.0 on FY 2008 CEPS, it falls to just 11.2 and 7.6 on FY 2009 and FY 2010 CEPS respectively.
| | 0603 (12) | 0703 (12) | 0803 (12P) | 0903 (12P) | 1003 (12P) |
| Sales | 263.47 | 317.56 | 409.79 | 532.73 | 778.60 |
| OPM (%) | 73.7 | 84.4 | 87.0 | 88.0 | 90.0 |
| OP | 194.28 | 268.06 | 356.33 | 468.80 | 700.74 |
| Other inc. | 4.47 | 17.45 | 27.59 | 25.00 | 20.00 |
| PBIDT | 198.75 | 285.51 | 383.92 | 493.80 | 720.74 |
| Interest | 41.28 | 45.65 | 86.25 | 101.25 | 126.25 |
| PBDT | 157.47 | 239.86 | 297.67 | 392.55 | 594.49 |
| Dep. | 79.06 | 102.61 | 163.88 | 213.88 | 288.88 |
| PBT | 78.41 | 137.25 | 133.79 | 178.67 | 305.61 |
| Tax | 31.73 | 47.88 | 51.11 | 60.75 | 103.91 |
| PAT | 46.68 | 89.37 | 82.68 | 117.92 | 201.70 |
| EPS (Rs)* | 0.8 | 1.6 | 1.5 | 2.1 | 3.6 |
| CEPS (Rs) | 2.2 | 3.4 | 4.4 | 5.9 | 8.7 |
| * Annualised on current equity of Rs 561.86 crore. | |||||
| Gujarat State Petronet: Results |
| | 0712 (3) | 0612 (3) | Var. (%) | 0712 (9) | 0612 (9) | Var. (%) | 0703 (12) | 0603 (12) | Var. (%) |
| Sales | 110.63 | 87.09 | 27 | 301.79 | 234.44 | 29 | 317.56 | 263.47 | 21 |
| OPM (%) | 87.8 | 86.6 | | 86.7 | 84 | | 84.4 | 73.7 | |
| OP | 97.16 | 75.40 | 29 | 261.51 | 197.00 | 33 | 268.06 | 194.28 | 38 |
| Other inc. | 9.63 | 3.90 | 147 | 20.59 | 12.45 | 65 | 17.45 | 4.47 | 290 |
| PBIDT | 106.79 | 79.30 | 35 | 282.10 | 209.45 | 35 | 285.51 | 198.75 | 44 |
| Interest | 20.81 | 10.35 | 101 | 61.25 | 29.25 | 109 | 45.65 | 41.28 | 11 |
| PBDT | 85.98 | 68.95 | 25 | 220.85 | 180.20 | 23 | 239.86 | 157.47 | 52 |
| Dep. | 41.38 | 23.64 | 75 | 121.88 | 68.14 | 79 | 102.61 | 79.06 | 30 |
| PBT | 44.60 | 45.31 | -2 | 98.97 | 112.06 | -12 | 137.25 | 78.41 | 75 |
| Tax | 19.40 | 16.88 | 15 | 39.62 | 41.95 | -6 | 47.88 | 31.73 | 51 |
| PAT | 25.20 | 28.43 | -11 | 59.35 | 70.11 | -15 | 89.37 | 46.68 | 91 |
| EPS (Rs)* | 1.8 | 2.0 | | 1.4 | 1.7 | | 1.6 | 0.8 | |
| CEPS (Rs) | 4.7 | 3.7 | | 4.3 | 3.3 | | 3.4 | 2.2 | |
| * Annualised on current equity of Rs 561.86 crore. | |||||||||
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