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Buy Gujarat State Petronet Ltd For Target Rs.500

Volume recovery ahead of our estimate

* GUJS reported a marginally higher (+5%) transmission volume than our estimate at 36.8mmscmd (+11% YoY and +9% QoQ), with implied tariff at INR1,282/mscm. Demand recovery from the refining/petchem segment offsets weak demand from CGDs, while demand from the Power sector recovered QoQ.

* Volumes in Jul’21 have recovered further to 39.4mmscmd. The management expects it to improve from here on as the demand from the CGD sector normalizes (after being impacted by the second COVID wave), along with increased flow of gas from RIL’s KG basin to customers in Gujarat.

* RIL has bought ~8mmscmd (4.8mmscmd/3.2mmscmd in auction II/III) of its own KG basin gas. Various companies (GSPC, Essar Steel, GSFC, etc.) have procured gas in the two auction rounds. We believe substantial volumes will flow to Gujarat, and thus on the pipeline of GUJS.

* The Mehsana-Bhatinda pipeline is now guided to be completed by FY22-end as the lockdowns and farmers protest continue to create hurdles in the completion of the same. We reiterate our belief that volumes for GUJS would jump to ~44mmscmd in FY23E as the company is also a beneficiary of: a) the upcoming LNG terminals in Gujarat, and b) increased demand due to focus on reducing industrial pollution (Gujarat has five geographical areas identified as severely/critically polluted), and c) commissioning of the Mehsana-Bhatinda pipeline.

* Investments in GUJGA and Sabarmati Gas, at a 25% holding discount, offer a valuation of INR360 (after a huge run up of ~45% in GUJGA’s share prices over the last two months). Valuing the core at 7x adjusted Sep’23E EPS of INR20 and adding the value of investments, we arrive at a valuation of INR500/share.

EBITDA came in line with our estimate

* Revenue stood at INR4.4b (+9% YoY and +12% QoQ). EBITDA stood in line at INR3.7b (+8% YoY and +9% QoQ). Interest cost continues to fall sequentially (- 52% YoY and -19% QoQ).

* The company recognized INR14m as loss from discontinued operations on account of the transfer of Amritsar and Bhatinda GAs to GUJGA.

* PAT stood at INR2.3b (+16% YoY and +12% QoQ), with the tax rate at 26.3%.

Sectoral volume details

* Refining and petchem recovered to 11.8mmsmcmd (+4% YoY and +58% QoQ).

* The above segment offsets lower volumes from CGDs at 11mmscmd (-18% QoQ, impacted by the second COVID wave).

* The Power sector saw a 16% QoQ improvement to 5.5mmsmcd (although it was down 46% YoY – as spot prices are higher on a YoY basis).

* Fertilizer volumes stood at 2.6mmsmcd (-3% YoY and -15% QoQ).

* Others volumes stood at 5.9mmsmcd (+36% YoY and +16% QoQ).

Valuation and view – maintain Buy

* Available LNG capacity in Gujarat is expected to grow by 55% to 42.5mmtpa over the next 3-4 years. Most of this volume is expected to flow through GUJS’ network. Based on the same, we believe that the company can easily record an 8-10% CAGR in transmission volumes over the next 5-6 years (in line with the 10% volume CAGR over the last five years).

* Around 4mmscmd of gas is currently flowing through Phase-I of the MehsanaBhatinda pipeline and has become cash flow profitable. Phase II commissioning is expected by the end of FY22, post which total volumes should reach 9.5- 10mmscmd. IOCL’s Panipat and Bhatinda refinery would start consuming ~2.5mmscmd of gas each.

* Since GUJS is currently operating at 90-95% utilization rate, the company needs to incur a capex of INR45.4b to accommodate the rise in volume. This would ensure that tariffs are not cut for the HP gas grid. The stock trades at 16x FY23E EPS of INR20 and 10x FY23E EV/EBITDA. We maintain our Buy rating with a TP of INR500/share.

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