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Weak demand, but tariff and expansion issues to be resolved over FY23E

We met with the senior management of GSPL (Exec Director, gas business) for an update on business and the outlook ahead. Key takeaways:

* Demand remains depressed: Demand prospects remain muted in Gujarat across sectors, be it power or CGD. As a result, contracted transmission flows have shrunk to <27mmscmd in Q2FY23-TD and are unlikely to see much traction in the near term. Lack of traction would be due to: 1) the widening differential between LPG and gas, and 2) weak economics of gas usage for power at current LNG rates. Nevertheless, ‘use or pay’ charges and some opportunistic trading of cargoes bought in Jun’22 at

* Regulatory environment has improved: In recent months, the reconstituted PNGRB has moved ahead on long-pending issues with respect to GSPL tariff and capex inclusions. A longer ramp-up now allowed (10 years vs 5 earlier), likely inclusion of ‘system use gas’ (SUG) @0.2% and allowing the inclusion of expansion capex of some new pipelines [e.g. the HPCL Chhara connectivity to Londhpur (Rs7bn)] in the network tariff are all material positives. These changes imply that the anticipated 20% reduction in net tariff post the new tariff order (due to volume- and tax-related adjustments) may now be negligible and can materially alter the NPV of GSPL’s pipeline network over the life of the assets.

* Capex plans are now moving ahead with some urgency: Post the forward movement being seen on the regulatory front, GSPL has 5 projects lined up, big and small, in the following order of priority: 1) Jamnagar-Dwarka pipeline, 2) HPCL Chhara connectivity, 3) expansion project for connecting new capacity at PLNG Dahej to Bhadbhut, 4) Anjar Palanpur, and 5) Swan energy terminal connectivity. Cumulatively therefore, GSPL has aggressive plans to invest >Rs20bn in various pipeline expansions and utilisation of even 30% of the expansions can net 20- 21mmscmd of transmission volumes by end of FY25E (vs the current base of 28- 32mmscmd).

* A solid play in the long-term perspective: With a high probability of negligible tariff decline even post the revision order expected in the next few months, GSPL’s standalone business value itself can see an appreciation of Rs40/sh as per our rough-cut estimates. While consolidated earnings may remain muted due to weak demand for both GSPL transmission volumes as well weaker prospects for subsidiary GGL at least in FY23E, valuations at <9x FY24E EPS and just 3.2x EV/EBITDA remain extremely skewed towards reward from a risk-reward perspective. We revise our FY23E and FY24E EPS by -11/-5% while longer-term volume and tariff adjustments drive a 10% increase in the target price to Rs375/sh. Reiterate BUY.

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