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EBITDA misses estimates; maintain LONG on attractive valuations
Gujarat State Petronet’s (GSPL) 4QFY19 revenues grew 24% yoy to Rs 4.4bn, 4% below EE, driven by higher tariffs as volumes at 32.4mmscmd missed EE by 3% on RIL off-taking lower volumes during the quarter. Higher other expenses driven by greater SUG costs (which have normalized in 1Q) led to an EBITDA miss. Transmission volumes are expected to remain high with (1) higher volumes supplied to Morbi given the blanket ban on coal gasifiers, (2) current spot LNG prices of ~US$ 5/mmbtu driving gas demand from the power sector, and (3) higher offtake from Cairn India (from 1.5mmscmd to 2.5- 3mmscmd). GSPL’s core business is trading at 7x FY20E P/E, but earnings CAGR would be in mid-single digits given flattish volumes in FY20. We maintain LONG with a SOTPbased Jun’20 TP of Rs 222 (Mar’20 TP of Rs 217 earlier) with core business valued at 11x P/E and investment value in GGAS at Rs 70/sh.
Multiple triggers for high-volume growth:
GSPL’s volumes stood at 32.4mmscmd in 4QFY19 with full-year volumes at ~34.6mmscmd. RIL has reduced its LNG offtake on full utilization of its petcoke gasifier, pulling down volumes for GSPL, even as volumes have normalized in Q1FY20. We expect flattish volumes in FY20E as RIL reduces LNG offtake to 7mmscmd vs. 10mmscmd. This would be offset by higher CGD volumes, particularly from Morbi. Also, Cairn is likely to ramp-up volumes to 2.5-3mmscmd from 1.5mmscmd in H1FY20. We have built in volumes of ~33/36mmscmd for FY20E/FY21E.
EBITDA growth on higher transmission tariff:
Transmission volumes for 4QFY19 declined 5% yoy/6% qoq to 32.4mmscmd, coming in 3% below EE. However, strong realizations driven by a tariff hike led to transmission tariffs of Rs 1.4/scm, up 28% yoy, in line with EE. Revenues grew 24% yoy to Rs 4.4bn, 4% below EE. While employee costs increased 39% yoy on salary hikes taken in the previous quarter, other expenses grew 91% yoy on (1) high gas transmission expenses with Rs 810mn paid to RIL for gas compression (offset against revenue), (2) expenses of Rs 210mn paid to use GINL (Mehsana Bhatinda pipeline), and (3) one-time CSR expenses of Rs 125mn towards Vibrant Gujarat. This restricted EBITDA at Rs 3.3bn, up 14% yoy and 12% below EE.
PAT down 3% yoy:
Strong EBITDA growth was offset by a jump in interest costs to Rs 505mn (on debt taken to fund GGAS acquisition) and a 54% yoy decline in other income to Rs 79mn. This pulled down PAT by 3% yoy to Rs 1.5bn.
Consolidated performance — strong revenue growth, margins hit by higher interest costs:
Consolidated revenues grew 29% yoy with standalone revenues up 41% yoy. Consolidated EBITDA margins declined ~100bps yoy on higher other expenses. This along with a sharp uptick in interest costs due to an increase in debt restricted PAT growth at 24% yoy to Rs 12bn.
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