FY18e EPS up 2% to factor in higher transmission volumes; TP revised to Rs180
We expect 3-6% dilution in GSPL’s earnings and 350 bps moderation in RoAE over FY2019-20e from the acquisition of GSPC’s 28.4% stake in Gujarat Gas at a price closer to CMP. We remain apprehensive about GSPL’s rising commitments on cross-country pipelines, new LNG terminals and CGD licences, as the business economics for each may remain challenging in the initial years. We retain Sell rating on the stock with a revised SoTP-based target price of Rs 180 (Rs 200 earlier).
Dilution in earnings and return ratios from proposed acquisition of Gujarat Gas: Our preliminary calculations suggest 3-6% dilution in GSPL’s EPS and ~350 bps moderation in RoAE over FY2019-20e from the proposed acquisition of stake in Gujarat Gas. GSPL management has indicated that the transaction may be executed in the coming week at a price closer to CMP and will be funded by Rs 32 bn of incremental debt at 8.25% interest cost.
Retain Sell: We retain our FY2019-20e standalone EPS estimates for GSPL, while raising FY2018e EPS by 2% to Rs 12.4 factoring in higher transmission volumes during Q4FY18. However, we have reduced our SoTP-based target price to Rs 180 from Rs 200 previously. We find the stock fully valued and retain our Sell rating, while noting risks of dilution in return ratios from aforementioned investments in other parts of gas value chain. We also see a plausible de-rating in valuation multiple for GSPL with greater holding company structure, as Gujarat Gas will contribute nearly half of GSPL’s fair value post this transaction.