Higher gas production and LNG imports will help GSPL pump more gas and earn healthy profits.
In times of uncertainty, there are very few companies that provide visibility in terms of revenue and profit growth. One of them is Gujarat State Petronet (GSPL), which is the country’s only ‘natural gas transmission’ player operating on an ‘open access’ basis. Despite some blips seen in recent months, in the form of subdued quarterly performance and contribution towards Gujarat Socio-Economic Development Society (GSEDS), the company’s prospects look healthy in light of the gas production from Reliance Industries’ (RIL) KG-basin and new LNG capacities coming on stream. In the long run, as new gas discoveries like those of ONGC and GSPC (GSPL’s parent) reach commercial production stage, growth prospects for GSPL can only get better.
Sound business
The Gujarat government, through GSPC and other state-owned companies, holds 49.2 per cent stake in GSPL. Established to set up a natural gas transmission network in the state of Gujarat, GSPL has till date commissioned a pipeline network of 1,130 kilometers (kms) and has another 500 kms under construction. In addition, about 400-500 kms is in the planning stage. GSPL provides its gas transmission infrastructure on an ‘open access’ basis, which means the transmission capacity is available to any player on a non-discriminatory basis for a fee. For long-term transmission agreements, the contract period typically varies between 5-25 years, while a small chunk of the company’s revenues also flows from short-term contracts. Thus, the company generates a steady income from its business, barring situations where gas transmission volumes fall.
Output boost
GSPL’s gas transmission volumes are seen increasing from about 16 mmscmd (million metric standard cubic metre per day) currently to a little over 20 mmscmd in FY10. The company has already signed a 20-year agreement with Torrent Power to supply around 5 mmscmd of gas for the latter’s 1,150 MW power plant. This plant is expected to go on stream in phases from April 2009, wherein gas supplies will be scaled up from the initial requirement of about 2 mmscmd.
Likewise, an agreement with RIL is also in place, which will see GSPL transmit about 11 mmscmd of gas from the entry point in Gujarat to RIL’s Jamnagar complex. However, analysts say that since the Gas Utilisation Policy announced by the government (where the initial 40 mmscmd has been reserved for allocation to the power and fertiliser sectors) is silent on allocation of gas for internal consumption, the 11 mmscmd gas supplies to RIL may start only by end-FY10. This is also assuming that RIL will commence production from its KG-basin by March 2009, wherein the initial production will be scaled up from 5-10 mmscmd to 40 mmscmd by end-2009 and to 80 mmscmd in FY11.
Nevertheless, by FY11, expect gas transmission volumes of GSPL to nearly double to 31-32 mmscmd. The additional boost may also come from the commissioning of new LNG regassification (RLNG) capacity of Petronet LNG by around October 2009.
| STEADY GAS FLOW | ||||
| in Rs crore | FY08 | FY09E | FY10E | FY11E |
| Revenues | 418 | 464 | 653 | 916 |
| PBT * | 149 | 115 | 171 | 267 |
| Net profit | 100 | 76 | 106 | 190 |
| EPS (Rs) | 1.69 | 1.35 | 1.91 | 3.38 |
| PE (x) | 19.64 | 24.59 | 17.38 | 9.82 |
| P/BV (x) | 1.64 | 1.57 | 1.49 | 1.44 |
| * Profit before tax after contribution to GSEDS E: Analysts estimates | ||||
That apart, analysts indicate that GSPL should also benefit from the implementation of new tariff guidelines (effective April 2010) announced by the regulator (Petroleum and Natural Gas Regulatory Board) for gas transmission services. Since these new rules allow a return on capital employed of 18 per cent on pre-tax basis, GSPL stands to gain as its current tariffs yield a lower return of about 15-16 per cent (adjusted for higher depreciation rate charged by GSPL). Thus, they expect overall returns for GSPL to improve from FY11 onwards.
Concerns
In the recent past, price of alternative feedstock like Naphtha had fallen sharply due to a weak demand outlook. Analysts believe that this could have led to some customers (with dual-feedstock capabilities) opting for the alternative feedstock, and thus, the decline in GSPL’s volumes of spot RLNG in Q3 FY09. However, the impact on financials was far lower (y-o-y growth of 6 per cent in revenues and 9 per cent in profit in Q3) due to ‘take or pay’ agreement with customers, wherein the latter is required to pay even if the offtake is lower. Analysts see this volume decline as an aberration. Also, naphtha prices have risen lately, rendering RLNG competitive. Thus, they expect RLNG volumes to pick up in Q4 with a visible improvement from Q1 FY10.
Secondly, the Gujarat government’s request to its state-owned companies to contribute up to 30 per cent of their pre-tax profits towards GSEDS, came in July 2008. In case of GSPL, on February 2, 2009, shareholders approved the contribution of Rs 64.40 crore for FY09 to GSEDS. However, analysts had already cut their estimates for FY09 EPS to Rs 1.35. Likewise, the EPS for FY10 and FY11 has been accordingly lowered, assuming the contribution to GSEDS. But, despite the special payout, GSPL’s EPS is expected to more than double by FY11, which in itself is considerable.
Investment rationale
Despite some glitches in the recent past and the expected payouts to GSEDS, GSPL’s prospects look good due to the expected increase in transmission volumes and requisite investment in capacity expansion. Since it is not involved in trading of gas, there is no risk in terms of price movements.
Secondly, the boost from higher returns on capital invested in the business will provide further kicker to GSPL’s earnings from FY11 onwards. The macro outlook, too, is conducive given India’s huge appetite for cleaner fuels like natural gas, which should get a boost from new discoveries by RIL, ONGC, GSPC and others, going ahead.
Importantly, GSPL operates in the country’s most industrialised state, Gujarat, which incidentally is the largest consumer of natural gas accounting for a third of India’s consumption—demand for natural gas in Gujarat is seen rising to 95-100 mmscmd by 2010 from about 60 mmscmd currently. Thus, expect GSPL to clock healthy volume growth in its core gas transmission business over the next 3-5 years at least. The company’s long-term investment, in the form of small stakes in two companies setting up city gas distribution network in Gujarat, is also seen as value accretive. At Rs 33.20, the stock trades at a price-to-estimated FY10 book-value of 1.5 times, and can deliver 18-20 per cen in a year’s time.
