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Volumes dip but recovery expected

* Gujarat State Petronet (GUJS) reported a miss on our EBITDA estimate primarily due to lower-than-estimated transmission volume of 22.3mmscmd (our est. at 26.7mmscmd; -30% YoY, -9% QoQ). However, implied tariff was in line with our estimate at INR1,678/mscm (+25% YoY).

* Spot LNG prices continue to fall to USD17/mmBtu for Mar’23 delivery from USD29.7/mmBtu in 3QFY23. A further decline in prices is expected to result in a volume recovery. We remain optimistic on the long-term volume growth for the company and expect the same to report ~22% CAGR during FY23-25E.

* The company is expected to benefit from the tariff reforms. The proposed capex for HP gas grid stands at INR45.4b up to FY32E, which would facilitate gas transportation from newer LNG terminals and obviate the need for a tariff cut. ? Given the underperformance in 3QFY23, we reduce our revenue estimates by 8%/8%/7%, EBITDA estimates by 10%/8%/8% and EPS estimates by 10%/9%/ 9% for FY23/FY24/FY25, respectively.

* The stock is trading at a P/E of 14.7x FY24E EPS of INR18.1 and EV/EBITDA of 9.4x. Return ratios are expected to be at 10-11% during FY23-25E. We maintain our BUY rating with a TP of INR339, implying an upside potential of 27%.

EBITDA below estimate; volumes lower than expected

* GUJS’ total volumes were 16% below estimate at 22.3mmscmd (-30% YoY, -9% QoQ) in 3QFY23.

* EBITDA was at INR2.7b (est. of INR3.6b, -20% YoY, -19%QoQ), with implied tariff of INR1,678/mscm (+25% YoY).

* EBITDA margin declined to 77.5% (v/s 86.7% in 2QFY23) during the quarter due to higher other expenses at INR528m (v/s 351m during 2QFY23).

* PAT was at INR1.7b (est. of INR2.3b, -20% YoY, -46% QoQ).

* For 9MFY23, revenue was at INR11.5b (down 10% YoY), EBITDA was down 12% YoY at INR9.6b, and PAT stood at INR7.2b (-7% YoY).

* Volumes were down 28% YoY to 25.5mmscmd, with implied tariff at INR1,619.2 (+25% YoY).

Sectoral volume details

* CGD volumes decreased to 8.4mmscmd (-35% YoY, -3% QoQ).

* Fertilizer volumes were at 3.8mmscmd (+20% YoY, +4% QoQ).

* Power/ref-petchem volumes stood at 0.8/6mmscmd (-24%/+88% QoQ).

* Other volumes stood at 3.3mmscmd (-35% YoY, -15% QoQ).

Valuation and view – maintain BUY

* The available LNG capacity in Gujarat is expected to grow 55% to 42.5mmtpa over the next 3–4 years. Most of this volume is likely to flow through GUJS’ network. We believe the company could post a 22% CAGR in transmission volumes over FY23-FY25E.

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