The Petroleum and Natural Gas Regulatory Board’s (PNGRB) recent order on rates for Gujarat State Petronet (GSPL), the gas transmission company, has got a thumbs-up from most brokerages. This is due to two key reasons. Though the order means a rate cut of 12.5 per cent from current levels (weighted average) of Rs 1,034 per standard cubic metre (scm) and is far lower than GSPL’s demand of Rs 1,492 per scm, the rate determined, of Rs 904 per scm, is much higher than consensus Street expectations of Rs 750-850 per scm.
Second, the decision removes a key overhang (of potential significant rate cuts) on the GSPL scrip. In its latest report on the company, Nirmal Bang Equities noted the affirmative rate would wipe out the overhang and shift the focus towards volume ramp-up during these times of a falling K-G Basin D6 block production and implementation of three pipelines for GSPL to become a pan-India agency. “GSPL has been trading at a steep discount prior to its recent surge, on the back of tariff (rate) overhang, with the market expecting a significant downside to existing tariff. With the Gujarat tariff in line with the last three quarters’ blended tariff, we expect the tariff overhang will fade gradually and the discount to peers will narrow down,” it noted.
GSPL stock has outperformed the benchmark Nifty index in the past month, rising 4.1 per cent against Nifty’s gain of 1.3 per cent. But over the past year, against Nifty’s nine per cent gain, the GSPL stock has reported a decline of 30.9 per cent. Not surprisingly, the stock surged by a little over four per cent to Rs 78.20 on Wednesday, as against a rise of 0.6 per cent in the Sensex. Most analysts remain bullish on GSPL and expect upsides of seven to 30 per cent from current levels.
New rates - minor bruises
In its 30-page order, PNGRB maintained GSPL was charging a ‘discriminatory’ rate from different customers of its 2,239-km Gujarat gas grid. Against the Rs 39.6 per mBtu (million British thermal unit) rate suggested by GSPL, the regulator fixed Rs 23.9 per mBtu. The company management could not be spoken to for comments on the order.
The provisional rate cut for GSPL’s Gujarat pipeline network has two key aspects. About six per cent of the cut is from disallowance of system-use gas (SUG), meaning GSPL will have to return the cost of the entire SUG, including unaccounted gas (used for internal consumption, as well as losses) to consumers/shippers from November 20 onwards. However, given that the new prescribed rate is a mere two per cent lower than GSPL’s average ones since 2008-09, the impact on past periods will be limited. Analysts estimate the one-time impact of this retrospective rate cut to be anywhere between Rs 100 crore and Rs 330 crore. The remaining 6.5 per cent cut is from lower determined rates. Thus, the rate is 12.5 per cent lower than the current average but much lower than analysts’ expectations.
“While the retrospective nature of the cut could lead to a one-time impact of Rs 6 per share on our estimates, we believe this is largely already priced in. We do not expect a meaningful negative stock reaction to the decision and would view a sharp correction as a buying opportunity from a long-term perspective, given compelling valuations,” said Saurabh Handa and Abhishek Sahoo of Citigroup, in a note.
GSPL reported transportation revenues of around Rs 3,570 crore during December 2008-June 2012. According to sector insiders, GSPL has fixed a new rate at Rs 0.895 per standard cubic metres (scm), against the previous Rs 1.02 per scm for high pressure pipelines of 2,890 kms, which forms a major share of GSPL’s total pipeline. However, the rate for for the low-pressure pipeline of 660 km is yet to be out.
Going forward, this (order) could bring down GSPL’s high pressure rate from Rs 970 per tcm to Rs 900 per tcm (Rs 810 for the entire Gujarat network), potentially bringing down the fair value based on preliminary assessment to Rs 95 per share (including the retrospective impact), add the Citigroup’s analysts. This, however, would still translate into an upside of a little over 20 per cent for the stock from current levels.
| LIMITED IMPACT Impact of PNGRB tariff order on GSPL | |||
| Head | Tariff cut (Rs/ mmbtu) | Impact (Rs cr) | Impact (Rs /share) |
| Due to system use gas cost refund | 1.65 | 160 | 2.8 |
| Due to retrospective tariff revision | 1.77 | 172 | 3.1 |
| Total | 3.42 | 332 | 5.9 |
| Source: Citi Research, PNGRB | |||
Volumes hold the key
A sharp fall in domestic gas availability has made analysts sceptical about GSPL’s volume growth in the medium term. Analysts expect volumes to rise by four to eight per cent during FY12-14 but expect faster growth from FY15, due to scale-up in domestic production and capacity expansion at Petronet’s LNG terminals.
“With the overhang of tariff regulation behind us, we expect the stock performance to be driven by gas transmission volumes, which might remain subdued in the medium term. We maintain our ‘Add’ rating on GSPL, noting 12 per cent potential upside to our target price of Rs 84 and reasonable valuations of 9.7 times FY13 estimated earnings,” said Tarun Lakhotia and Vinay Kumar of Kotak Institutional Equities.
