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Domestic output growth drives profitability…

About the stock: Gujarat State Petronet (GSPL) is a gas utility company with its transmission network and investment in CGD companies.

* It operates a 2682-km transmission network in Gujarat as of March 2020

* Major portion of gas flowing through its network is contributed by refinery/petchem and CGD companies.

Q1FY22 Results: GSPL’s results were driven by growth in transmission volume.

* Revenue was up 13.5% YoY to | 527.2 crore on account of volume growth of 10.6% YoY to 36.8 mmscmd. Volume grew 8.7% QoQ

* EBITDA was at | 374.4 crore, up 8.2% YoY

* PAT was at | 231.9 crore, up 16.3% YoY.

What should investors do?

In the long run, the transmission business is expected to report stable volumes on the back of growth in CGD sector, increasing domestic production and increased LNG capacity in Gujarat.

* We maintain our BUY rating on the stock

Target Price and Valuation: We value GSPL’s transmission business at ~| 170/share. At the CMP, GSPL’s investments in its listed CGD entity Gujarat Gas (54.1% stake) and unlisted Sabarmati Gas, is trading at ~66% discount. We value its investments at ~| 244/share at 50% discount to arrive at a target price of | 415/share.

Key triggers for future price performance:

* Beneficiary of increasing gas consumption and its connectivity to new LNG terminals in Gujarat

* Ramp up in domestic gas output and growing CGD sector in Gujarat to aid volume growth

* Potential appreciation/lower holding company discount in value of its listed subsidiary, Gujarat Gas

* Any downward revision in tariff can impact profits.

Alternate Stock Idea: Besides GSPL, in our oil & gas coverage we also like Gail.

* Gail is India’s leading gas transmission company. It is a beneficiary of increasing gas consumption. Stable volume growth along with higher profitability from gas trading, petchem and LPG segment due to higher oil prices will add value

* BUY with a target price of | 175

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