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Volume declines sharply, but largely offset by ‘use or pay’ income

GSPL’s 2QFY23 EBITDA was largely in line at INR 3.3bn vs. JMFe/consensus of INR 3.3bn/INR 3.1bn as a sharp decline in transmission volume was offset by higher transmission EBITDA margin. Transmission volume was 18% below JMFe at 24.6mmscmd (down 17% QoQ and down 35% YoY) due to the impact of high spot LNG prices on domestic LNG demand in CGD, Power and Refinery/Petchem segment. However, implied transmission EBITDA was higher at INR 1,430/tcm (vs. JMFe of INR 1,150/scm and INR 1,300/scm in 1QFY23) mostly due to booking of ‘use or pay’ income given the sharp decline in volume during the quarter. We maintain BUY (unchanged TP of INR 325) given most of GSPL’s value is driven from its stake in Gujarat Gas (GGas), whose business we like as we expect its volume growth to sustain in the medium to long term.

* Transmission volume 18% below JMFe at 24.6mmscmd led by decline in LNG demand in CGD, Power and Refinery/Petchem segment: GSPL’s 2QFY23 EBITDA was largely in line at INR 3.3bn vs. JMFe/consensus of INR 3.3bn/INR 3.1bn as the sharp decline in transmission volume was offset by higher transmission EBITDA margin. However, PAT was higher at INR 3.1bn vs. JMFe/consensus of INR 2.6bn/ INR 2.2bn due to higher other income (at INR 1.0bn vs. JMFe of INR 0.8bn) and lower tax (tax rate of 18.9% vs. JMFe of 25.2%). Transmission volume was 18% below JMFe at 24.6mmscmd (down 17% QoQ and down 35% YoY) due to the impact of high spot LNG prices on domestic LNG demand. On a QoQ basis, the CGD sector saw volume decline by a sharp 2.2mmcmd QoQ to 8.7mmscmd (Exhibit 4) — this was mostly driven by weakness in Gujarat Gas volume in 2QFY23. Further, Power sector saw volume decline by 1.3mmscmd QoQ to 0.4mmscmd, Refinery/Petchem segment saw decline by 1.2mmscmd QoQ to 7.9mmscmd and ‘others’ sector volume was down 0.6mmscmd QoQ to 3.9mmscmd. Only the Fertiliser sector saw volume rise, by 0.4mmscmd QoQ to 3.7mmscmd.

* Implied transmission margin higher mostly due to booking of ‘use or pay’ income: Implied transmission EBITDA was higher at INR 1,430/tcm (vs. JMFe of INR 1,150/scm and INR 1,300/scm in 1QFY23). This was due to higher weighted average tariff of INR 1,802/tcm (vs. JMFe of INR 1,550/tcm) mostly due to booking of ‘use or pay’ income given the sharp decline in volume during the quarter and possibly also due to higher volume flowing through the pipeline with higher tariff. Outstanding debt has fallen further to INR 0.05bn at end-2QFY23 (vs. INR 0.5bn at end-1QFY23).

* Maintain BUY due to our positive view on Gujarat Gas business model: We maintain BUY (unchanged TP of INR 325) given that most of its value is driven from its stake in GGas and we have a positive view on GGas’ business as we expect its volume growth to sustain in the medium to long term (except for near-term uncertainty due to high spot LNG prices). Our TP of INR 325 comprises: a) INR 100 for the existing pipeline business based on a DCF valuation, b) INR 211 for its 54.17% stake in GGas based on a 40% discount to CMP and c) INR 15 for its 27.5% stake in Sabarmati Gas based on 10x FY22 PAT. At CMP, GSPL is trading at 1.3x FY24E P/B (3-year avg: 1.7x).

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