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Earnings beat on higher Other Income; tariff review the key trigger

* GSPL’s Q2FY23 S/A revenue/EBITDA/PAT stood at Rs4.35bn/Rs3.34bn/Rs3.14bn, down 26%/12%/4% YoY and down 10%/down 7%/up 33% QoQ. Revenue and EBITDA deviation was 2-3%, while PAT beat our estimate by 14%, on higher Other Income.

* Gas transmission vol. fell 17% or by 4.9mmscmd QoQ to 24.6mmscmd (down 34% YoY, a 9% miss), with CGD sector offtake down 2.2mmscmd QoQ, power/refinery-petchem lower by 1.3/1.2mmscmd and other sectors down 0.6mmscmd, partly offset by fertilizer.

* Tariff realization came in at Rs1.66/scm, up 9% QoQ (10% above estimate), including ship-or-pay charges. Other expenditure fell 33% YoY/23% QoQ to Rs351mn, while employee cost was up 10% YoY/12% QoQ, at Rs161mn.

* We raise FY23E EPS, as we delay the tariff cut to FY24 and assume take-or-pay gains (FY25E EPS also cut, by 11%, for the same reason). But our Sep-23 DCF/SOTP-based TP remains unchanged at Rs325. We await tariff review clarity, which is key. Retain BUY.

Highlights: For Q2FY23, GSPL’s gas transmission expense fell 65% YoY/20% QoQ to Rs496mn. Depreciation was up 2% QoQ at Rs488mn, while interest costs declined to only Rs11mn, on low debt levels of Rs48mn. Electricity income was down 18% YoY at Rs106mn (a miss). EBITDA/scm rose 10% QoQ to Rs1.48 (a 13% beat, up 34% YoY). Other income was up 15% YoY at Rs1.04bn (due to Gujarat Gas dividends) and a 14% beat to our estimates. Tax rate was also lower, at 19% for Q2FY23 (vs the 25% built-in by us).

Guidance: Current volumes stand at 24-25mmscmd and the outlook depends on the CGD and power sectors. With cooling of LNG prices, demand is likely to recover. Price of propane remains cheaper than that of gas; hence, CGD/PNG demand would be contingent on the economics. Mehsana Bhatinda pipeline volumes are 3.4-3.5mmscmd currently, as Vedanta supplies saw some downtick; but volumes should recover going ahead. The line is mostly complete, with only one district pending completion in Punjab. FY23 YTD capex is low, though EPC has been awarded for the Rs6.5bn-85km Chhara LNG terminal connectivity, which will take 1.5 years to complete. Tariff review is expected to come post the notification of new regulations. GSPL seems to be first in line for this. GSPL is recovering its take-or-pay charges within the fortnightly cycle.

Valuation: We lower our volume assumptions, but delay the tariff cut to FY24. We value GSPL on SOTP basis and the core business on DCF method. For GSPL, the upcoming tariff review is crucial, as it would give medium-term earnings visibility vs the ongoing uncertainty that has created an overhang on the stock despite trough valuations. We build-in an effective tariff cut of 35-40%, but the stock seems to be pricing-in almost nil value for the core business (assuming Gujarat Gas at 40% holdco discount to our Rs520 revised FV). Key risks: Adverse oil-gas prices/demand, industrial slowdown, cost overruns, and regulatory overhangs.

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