| GSPL-Good Fortune Smiles BUY
Armed with the requisite constitutional power post the notification of Section 16 of the Petroleum & Natural Gas Regulatory Board (PNGRB) Act, PNGRB has expedited the bid process for new inter-state gas pipelines, entailing ~Rs224bn capex.
The PNGRB has initiated bidding for four inter-state gas pipelines and is expected to open the financial bids for two pipelines, Mallawaram-Bhilwara (MBPL) and Mehsana-Bhatinda (MeBPL) in August, covering ~1,700kms distance each.
All the pipelines offer immense opportunities for gas transmission firms, GAIL and Gujarat State Petronet (GSPL). Three of the new pipelines would cover a distance of ~1,700Kms each and one would cover 740Kms.
The consortium among Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL), Hindustan Petroleum Corporation (HPCL) and GSPL (52:26:11:11) has bid for both MBPL and MeBPL, while GAIL and Adani-Welspun-ILFS have bid for MBPL and MeBPL respectively. New pipeline infrastructure on fast track. Post the notification of Section 16, PNGRB Act, set-up of gas infrastructure in India has gained priority – the PNGRB has invited bids for setting up four inter-state gas pipeline networks. Bids for two pipelines have already been closed in July and as per our interaction with the regulator and industry, financial bids for both the pipelines will likely be opened soon. Huge bonanza for gas transmission companies. Based on our calculations, shareholders of gas transmission companies would gain Rs76bn if a company wins all the contracts. This is based on a 12% RoCE over the life of the pipeline, a debt equity of 80:20 and execution period of three years. Bidding based on at least 12% RoCE. Given that the bids are competitive and confidential, calculating the exact RoCE for the business is unfeasible, but since there are only two bidders for each pipeline, we believe bidding would be based on at least 12% RoCE.
Moreover, higher returns through higher tariff bids and increased leverage can not be ruled out at present. consortium has bid for all four new pipelines; if the consortium wins all four pipelines its fair value would jump 70% to Rs169/share, implying a 51% upside at the current levels. Similarly, if GAIL wins MBPL, Bhatinda-Jammu (BJPL) and Surat-Paradip Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice. |
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