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Transmission tariff hike, key growth trigger

GSPL is a pure transmission play operating out of Gujarat in western India, second to GAIL in natural gas transmission. Along with GAIL, GSPL is working towards fulfilling the government’s target of increasing natural gas share in energy mix to 15% by 2030. GSPC, parent company of GSPL, holds 54.2% stake in Gujarat Gas. The capital raised for the GSPL stake in Gujarat Gas has been fully paid off. GSPC has 5mmtpa LNG terminal at Mundra in the Adani Port SEZ. GSPL’s existing HP gas grid receives supply of natural gas from Mundra-Anjar pipeline. Utilization of GSPC LNG had been low at ~12% during Apr’23-Oct’23.

With its well-connected pipeline network in Western India, and projections of volume growth of LNG imports to meet growing demand, GSPL is in a sweet spot. Further, it could become an integrated mid-stream and downstream gas player given that it has transmission business and LNG terminal under one roof.

Gujarat Gas’s CGD business growth over the past few years has yielded well for GSPL. Increase in gas consumption in the country and two new terminals coming up in Gujarat augurs well for GSPL. Transmission segment will benefit from the new pipeline under construction i.e., increased output from Mehsana-Bhatinda and RIL KG basin.

Volume growth imminent: Volume growth to come from increase in pipeline infrastructure and rise in consumption of natural gas by CGD

* developed gas transmission network (gas grid complete)

* robust industrial demand

* material supply infrastructure with four major LNG import terminals of ~42mtpa capacity operational by FY25.

Higher industry capex to improve transmission network:

* Mehsana-Bhatinda (2,052km, capex ~Rs69bn)

* Mallavaram-Vijaipur (1,881km, capex ~Rs81bn)

* Bhatinda-Srinagar (725km, capex Rs15bn).

The expansion will make gas available in new areas and increase GSPL’s volumes across sectors over the next 5-7 years.

PNGRB notification: PNGRB has capped unified transmission tariff at 12% post-tax RoCE. This move is expected to work well with transmission companies and result in laying of more pipelines across the country. The resultant volume growth will ultimately benefit GSPL. Inclusion of natural gas under GST would further accelerate transmission volumes, thus increasing the share of natural gas in energy mix. For GSPL’s main highpressure pipeline network, PNGRB had initiated a public consultation process in Jul’21. The former had asked for a tariff increase of ~60%, from Rs33.3/mmbtu to Rs54. We assume GSPL’s tariff at Rs35.5/mmbtu for FY25/26 (our tariff assumption is still very conservative).

Valuation: GSPL’s FY23-26 EBITDA would grow at a CAGR of 9.6% despite a 14.4% volume growth, due to a fall in tariffs. We initiate coverage with a ADD rating, at a TP of Rs375, valuing it on a sum-of-parts basis (core business at Rs163 at 1.4x P/BV, investment value in GUJGA at Rs200).

Risks: Changes in government regulation policies, smaller hike in natural gas transmission tariffs, steep movement in LNG & crude prices, slower execution of pipeline expansion plans, demand slowdown and high capex spends denying good returns.

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