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Muted quarter

Our BUY recommendation on Gujarat State Petronet with a TP of INR 271 is premised on the following: (1) robust transmission volume (+12% CAGR over FY21-23E to 49mmscmd) as benign spot LNG prices should continue to drive volume growth from industrial customers and encourage RIL to continue using LNG. This should translate into growth in standalone EBITDA and APAT by 10% and 12% CAGR to INR 44bn and INR 20bn in FY23E; (2) compelling valuation at 6.8x FY22E EPS, considering the high return ratios (RoE of 25/22% in FY22/23E) and steady cash flows (combined FCF of INR 49bn over FY21-23E).

* View on the result: 3QFY21 EBITDA/APAT was 3/3% lower than our estimates, mainly due to lower-than-anticipated volumes and transmission tariffs.

* Volumes: Gas transmission volume for the quarter was 39.4mmscmd (+1/- 1% YoY/QoQ) as against our estimate of 41.8mmscmd. Volume break-up in mmscmd was: Refinery 7.1, Power 9.1, CGD 13.0, Fertilisers 3.9, and others 6.3.

* Tariffs: Calculated blended transmission tariff for 3Q stood at was INR 1,245/tscm (-7/+0% YoY and QoQ), which was 1% lower than our estimates.

* Change in estimates: We raise our FY21/22E consolidated EPS estimates by 20.1/3.0% in FY21/FY22E to INR 28.6/33.0 to factor in the company’s 9MFY21 performance.

* DCF-based valuation: We value the transmission business using Discounted Cash Flow (DCF) at INR 96/sh (WACC of 11% and terminal growth rate of 3%). To this, we add INR 175/sh as the value of its investments in Gujarat Gas, Sabarmati Gas, etc. to arrive at the target price of INR 271/sh. The stock is trading at 6.8x FY22E PER.

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