Stocks of India’s leading gas transmission companies, GAIL (India) Ltd and Gujarat State Petronet Ltd (GSPL), made new 52-week lows last month on concerns regarding lower volume growth and likely unfavourable regulatory action on rates and marketing margins.
However, most analysts believe these concerns are overdone and there is limited downside for these scrips from the current levels. While most analysts are bullish on them, among the two, GAIL seems to be the preferred choice, largely because it has lesser regulatory risk as a majority of its rates are already regulated. Further, GAIL’s non-gas-based petrochemicals business as well as exploration activities will aid future growth (beyond FY13), believe analysts.
Sanjeev Prasad and Tarun Lakhotia of Kotak Securities, in a recent report, said: “Concerns are overdone on regulations and lower gas volumes for GAIL”. For GSPL, the likely trimming of its rates by the Petroleum and Natural Gas Regulatory Board (PNGRB), expected in the coming months, is partly reflecting in valuations. However, some analysts believe until clarity emerges on the issue, it could act as an overhang in the near term.
Muted volume growth priced in
Thanks to lower production of domestic gas (due to a decline in Reliance Industries Ltd’s KG D6 basin output), gas transmission volumes of both GAIL and GSPL have been impacted in recent quarters. With domestic gas production still an issue, most analysts are expecting muted volume growth in FY13 for the two companies. Another issue is capacity utilisation. GAIL and GSPL are expected to see an increase in their capacities as new pipelines become operational. But the gas supply crunch will likely lead to under-utilisation of these capacities, which in turn may impact their return ratios.
While GAIL has lowered its transmission volumes expectation by three per cent to 120 million standard cubic metres a day (mscmd), analysts expect the same to remain largely muted at 118 mscmd in FY13. For GSPL, too, analysts expect the volume growth to be muted at around three-four per cent over FY12-15.
Regulatory concerns
On the regulatory front, there are two major concerns. Firstly, the PNGRB is likely to revise the rates of new pipeline networks and, secondly, a cap on marketing margin could be on the cards.
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While GSPL’s stock price is factoring in a rate of Rs 600 per mscmd, any significant reduction from these levels will rub off negatively on the stock. However, analysts don’t expect such a scenario. Alok Deshpande and Stuart Murray of Elara Securities say: “There is limited downside to the current tariffs as GSPL’s post-tax return on capital employed is around 14-15 per cent, only slightly above the regulated figure of 12 per cent”.
| GAIL: BETTER OUTLOOK | ||||||
| In Rs crore | FY12 | FY13E | FY14E | |||
| GAIL | GSPL | GAIL | GSPL | GAIL | GSPL | |
| Revenues | 40,896 | 1,123 | 45,416 | 1,115 | 49,214 | 1,124 |
| Y-o-Y change (%) | 24.2 | 8.1 | 11.9 | -0.7 | 8.4 | 0.8 |
| Ebitda (%) | 13.2 | 91.9 | 12.9 | 91.0 | 13.4 | 90.7 |
| Y-o-Y change (bps) | -340 | -60 | -30 | -90 | 50 | -30 |
| Net profit | 3,654 | 522 | 3,708 | 491 | 4,171 | 485 |
| Y-o-Y change (%) | 2.6 | 3.1 | 1.5 | -5.9 | 12.5 | -1.3 |
| P/BV (x) | 1.8 | 1.4 | 1.7 | 1.2 | 1.5 | 1.1 |
| E:Estimated Source: Emkay Research | ||||||
For GAIL, most of its pipelines are already charging regulated rates. However, gas transmission rates of the new DV-GREP (Dahej Vijaipur Gas Rehabilitation and Expansion Project) pipeline are likely to be scaled down by 21 per cent from Rs 53.65 per mbtu (million British thermal units), according to Kotak’s analysts. This cut will be largely driven by lower capital expenditure (capex). Nevertheless, this move will not impact the earnings significantly due to lower utilisation in initial years of operation (starting FY13).
The marketing margin charged by transmission companies is also under the PNGRB scanner. Analysts believe these can be fixed at Rs 0.2/cubic metre for gas sold by GAIL for FY13-16 (currently at Rs 0.2-0.32/cubic metre). But, given that 80 per cent of GAIL’s total gas volumes (from nominated and Panna-Mukta-Tapti fields) is marketed at margins determined by the ministry of petroleum and natural gas, the earnings impact of such a move is likely to be marginal.
While concerns such as lower gas transmission volumes, regulatory risks and higher subsidy share of upstream companies is largely priced in GAIL valuations, the pessimism seems to be overdone. For instance, Prasad and Lakhotia of Kotak note: “GAIL’s current stock price implies negative value for its new gas transmission pipelines. The pipelines have value (valued on discounted cash flow or simply on cash invested) that will crystallise as visibility improves on LNG (liquefied natural gas) imports and domestic gas supply. GAIL’s total capex on the three new pipelines is Rs 12,800 crore (Rs 101/share). However, a reverse valuation would suggest that the market is ascribing a negligible value of Rs 3/share to the three pipelines.”
Further, analysts believe as its Kochi and Dabhol terminals achieve full utilisation levels in FY14, transmission volumes are likely to improve. GAIL’s plans to double capacity of high margin yielding petrochemicals business by FY14 would further boost earnings growth. The business contributed 27 per cent to GAIL’s FY12 profits. On the flipside though, uncertainty on subsidy sharing mechanism will weigh on its earnings and the stock. Overall, analysts have one-year target price ranging Rs 380-420 for GAIL, indicating an upside of 16-29 per cent.
For GSPL, too, most analysts are positive due to attractive valuations with one-year upside potential 9-12 per cent.