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Lower volumes offset by higher realization

* Gujarat State Petronet (GUJS)’s 3QFY24 EBITDA was in line with our est. at INR3.8b, led by higher realization of INR1,628/mmscm. EBITDAM was 110bp lower than our estimate at 83.3%. Volumes were lower than our estimate at 29mmscmd due to lower offtake by the power sector.

* The management highlighted that there has been an increase in HP volumes, which led to better realization. LP volumes declined during the quarter. Incremental revenue from the ~3mmscmd Mehsana-Bhatinda pipeline contributed to realization improvement. ? Spot LNG price is currently at ~USD9.5/mmBtu vs. ~USD15.8/mmBtu in 3QFY24, which bodes well for volumes of the company.

* The company’s HP gas grid is also up for a tariff revision and might benefit from the tariff reforms announced last year. The proposed capex for the HP gas grid stands at INR45.4b for up to FY32, which would facilitate gas transportation from new LNG terminals and obviate the need for a tariff cut.

* We have not changed our estimates as of now, as the 3Q performance was largely in line with our estimates. The stock is trading at a P/E of ~20x FY25E EPS of INR19 and EV/EBITDA of ~13x. We maintain our BUY rating with a TP of INR450.

In-line performance; lower volume offtake by power sector

* Total volumes were below our estimate at 29mmscmd (+30% YoY).

* CGD volumes increased to 10.9mmscmd (+29% YoY). Fertilizer volumes were 4.7mmscmd (+22% YoY). Power/ref-petchem volumes at 2.5/6.4mmscmd (3.2x/+8% YoY). Other volumes stood at 4.6mmscmd (+39% YoY).

* EBITDA was INR3.8b (our est. of INR3.7b, +41% YoY), with implied tariff at INR1,628/mscm. PAT came in at INR2.6b (our est. of INR2.6b, +53% YoY).

* GUJS implemented the unified tariff (UFT) from 1st Apr’23. As of 31st Dec’23, the company had a deficit of INR68m on account of invoicing done according to UFT and entitlements as per the approved tariff.

* For 9MFY24, revenue was INR13b (+13% YoY), EBITDA stood at INR11.3b (+17% YoY), while PAT was at INR10.2b (+42% YoY). Volumes were 29.5mmscmd (+16% YoY), while the implied tariff was INR1,550/mscm (-4% YoY).

Valuation and view

* The available LNG capacity in Gujarat is expected to grow by 55% to 42.5mmtpa over the next 2-3 years. Most of this volume is likely to flow through GUJS’s network. We believe the company could post a 13% CAGR in transmission volumes over FY23-FY26.

* We expect GUJS’s volumes to jump to ~37mmscmd in FY26 as the company is also a beneficiary: a) the upcoming LNG terminals in Gujarat, b) improved demand owing to the focus on reducing industrial pollution – Gujarat has five geographical areas (GAs) identified as severely/critically polluted, and c) the commissioning of Phase-II of the Mehsana-Bhatinda pipeline.

* Investments in GUJGA and Sabarmati Gas at a 25% holding discount provide a valuation of INR291. Valuing the core at 10x adj. Dec’25E EPS of INR15.9 and adding the value of investments, we arrive at our TP of INR450. We maintain our BUY rating on the stock with a potential upside of 21%.

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