Reiterate ‘outperform’ on Gujarat State Petronet (GSPL) with a target price of Rs 135 a share. With a marginal improvement in transmission volumes via higher LNG capacity and the delta via gas pooling expected to add to earnings, we believe valuations of 11x FY17e earnings and 5.6x EV/e remain attractive. We expect GSPL to benefit from higher tariffs and a gradual increase in volumes.
The upcoming merger of the two large CGD companies owned by the GSPC group would create India’s largest CGD entity, with ~7.5 mmscmd of volumes from 17 districts in Gujarat (14 operational and three being developed). With an estimated ~R6 per scm of Ebitda, we believe GSPL’s ~26% stake in the merged entity will deliver R2.6-3.3 of EPS to consolidated earnings, which is ~25% of our FY17e earnings.
With all regulatory approvals gradually coming through, we expect the new entity to list in Q2FY16e.
After the merger of Gujarat Gas Company (GGCL) with GSPC Gas, GSPL would own ~26% of the merged entity, implying a potential delta of ~25% on the base EPS in consolidated numbers. We believe that equity contribution for the three new pipelines is unlikely to impact the balance sheet materially, as GSPL’s contribution will be limited to its portion of equity (~R2,000 crore) and spread over three years.
After the weakness seen over FY13-14, GSPL has seen volumes consistently show growth over the last four quarters, with the weaker base of previous years and some recovery in demand from power plants and City Gas distribution companies fuelling the growth.