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Demand environment remains subdued

Gujarat State Petronet’s (GSPL) Q2FY23 performance was muted with EBITDA down 12% YoY (up 20% QoQ) to Rs4.4bn, and net earnings down 4% YoY at Rs3.1bn (I-Sec: Rs3.1bn EBITDA, Rs1.9bn PAT). The YoY dip in EBITDA was primarily due to 34% YoY (-17% QoQ) decline in transmission volumes to 24.6mmscmd, lowest in the past 16 quarters and below I-Sec estimate of 25.5mmscmd. Consolidated earnings, however, showed a relatively better trend led by stronger earnings from key subsidiary, Gujarat Gas (GGL). GSPL’s Q2FY23 consolidated EBITDA of Rs9.8bn was up 1% YoY, while net earnings fell 7.8% YoY to Rs4.4bn. H2FY23E prospects do seem muted with volumes from power and CGD sectors, in particular, likely to be constrained due to high prices of LNG and tight supplies. We do expect some revival in volume growth in FY24E, with GGL’s earnings continuing to support GSPL’s consolidated earnings. Valuations remain undemanding, underpinning our BUY rating on the stock.

* Volumes dip on high gas prices; FY24E to see stronger growth: Overall volumes (24.6mmscmd) were down 34% YoY, down 17% QoQ. CGD volumes (8.7mmscmd) dipped 34% YoY, refinery/petchem (7.9mmscmd) fell 22% YoY, fertiliser (3.7mmscmd) was up 9% YoY and power (0.4mmscmd) was down 92% YoY. We continue to expect stronger volume growth over FY24E driven by i) dominant presence in Gujarat, the state with a lion’s share of LNG import infra and pipeline connectivity; ii) growing CGD and industrial demand; and iii) transnational pipeline demand. Our estimates factor in 0.3% CAGR in volumes over FY22-FY24E.

* Tariff decline to depend on capex approvals: A longer ramp up to full capacity to be now allowed (10 years vs 5 earlier), likely inclusion of ‘system use gas’ (SUG) @0.2% and allowing the inclusion of expansion capex of some new pipelines [e.g. the HPCL Chhara connectivity to Londhpur (Rs7bn)] in the network tariff are all material positives from a tariff perspective. These changes imply that the anticipated 20% reduction in net tariff post the new tariff order (due to volume- and tax-related adjustments) may now be negligible (we assume ~10% cut in our estimates for FY24E).

* Cut estimates sharply for FY23E-FY24E; maintain BUY: We have raised our FY23E-FY24E consolidated EPS estimates by ~15-17% to factor in marginally better tariffs and higher Gujarat Gas earnings post its Q2 result. GSPL’s target price has been raised marginally to Rs383/sh, offering ~64% upside from CMP. Current valuations seem to capture the pessimistic view about Holdco discount and nearterm concern on tariffs. Maintain BUY.

* Key risks: Higher than estimated tariff cuts, slower demand recovery, and execution delays on pipeline expansions.

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