Robust volume outlook
We met the management of GUJS who indicated an improved outlook for gas demand in Gujarat. GUJS expects to sell higher volumes in FY18 (+3-5mmscmd) given stronger demand from RIL and OPAL units. But we see risks to volume growth post-FY18, once RIL’s petcoke gasification unit comes on-stream. A pipeline tariff hike is certain but the quantum (>20% expected) and timing remain unclear. Still, GUJS offers excellent risk-reward. We marginally raise estimates and revise our Mar’18 TP to Rs 210 (from Rs 205). BUY.
* Improved demand-supply outlook:
The recent decline in LNG prices coupled with a surge in imported coal prices has led to an improved outlook for natural gas demand. The start-up of RIL’s refinery off gas cracker (ROGC) project and ONGC’s OPAL polymer crackers could lead to an additional 2-3mmscmd of LNG consumption in FY18. Revival of offtake from ceramic units in Morbi could add another 1mmscmd to consumption. LNG supply options have improved after the recent commissioning of PLNG’s 5mmtpa capacity at Dahej. The 18mmscmd Mundra LNG terminal (owned by parent GSPC and Adani group) is expected to be commissioned by Q4FY18.
* Tariff hike imminent:
As PNGRB’s membership strength shrinks, the dispute over GUJS’ tariff hike could be a protracted one. GUJS may opt for a conditional hike in tariffs if the matter takes much longer to resolve. The company had submitted a steep revised tariff computation of Rs 59/mmbtu (from Rs 30/mmbtu currently) to PNGRB. Given the regulator’s history of rejecting most of the assumptions behind tariff calculation, we believe the final rate could end up being closer to our estimate of Rs 1.25-1.3/scm (or Rs 35-36/mmbtu, ~20% higher than current levels).
* Valuations compelling:
We raise our Mar’18 TP for GUJS to Rs 210 (pipeline business DCF at Rs 184/sh; 25% stake in Gujarat Gas at Rs 26/sh). Our pipeline business valuation implies a P/E of 15.5x FY19E EPS, in line with gas utility peers. GUJS’s earnings are not exposed to marketing margins and thus insulated from volatility.
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