Stock Review: Gujarat State Petronet (GSPL)

 

GSPL is likely to capture growing volumes once domestic gas supply improves. Long-term investors can buy the scrip

 

FLAT volumes and stagnating profits over the past five quarters and bleak outlook on the domestic gas production are key concerns for Gujarat State Petronet (GSPL). However, the strong and unmet domestic demand for gas is a reality, which will ultimately need GSPL's pipeline network to fulfil. GSPL's growing reach implies that it will be able to capture growing volumes once domestic availability of natural gas improves. Long-term investors should buy this scrip.

BUSINESS:

GSPL owns and operates India's second-largest natural gas pipeline network of nearly 1,900 km connecting 19 out of 26 districts of Gujarat. The company does not trade in natural gas and operates its pipeline grid on 'open access' basis. As a result, its entire income comes from pipeline tariffs. It is also setting up a 52.5-MW wind power capacity.

GROWTH DRIVERS:

The company continues to expand its network proactively with a capex of 600 crore annually, which it can finance comfortably through its internal accruals. With this capex plan, it aims to reach all 25 districts of Gujarat by FY14. It currently transports close to 35.5 million standard cubic metres per day (mmscmd) of gas and retains substantial extra capacity for additional volumes. FY12 is expected to add at least 1500MW gas based power capacities in Gujarat, which means higher volumes for GSPL. The GSPL-led group has emerged as the lowest bidder for three long-distance gas pipelines totalling nearly 4,500 km entailing a capex of 21,500 crore.

FINANCIALS:

At the end of September 2010, GSPL had a capital of nearly 3,440 crore invested in the business funded by debt and equity in 0.85:1 proportion. During 2010, the average tariff it earned was around 800 per thousand cubic metres, which was down from 950 in 2009. The company's quarterly net profits have stagnated at close to 110 crore since the September 2009 quarter. In the December 2010 quarter, it reduced the rate of depreciation from 8.33% to 4.75%, which boosted profit to 159 crore. This is still higher compared to Gail, which charges depreciation at 3.17% on its pipelines. The company's return on capital employed rose 27.8% in FY10 after hovering at around 11-12% in earlier years. Its ROCE is expected to remain high at around 24-25% for FY11 as well, thanks to the reduction in the depreciation rate.

VALUATIONS:

The valuations of the scrip have fallen to its lowest levels in the past five years due to the stagnation in profits and the lack of visibility over incremental gas supplies. Considering its profit for the trailing 12 months, the scrip is trading at a P/E of 11.7. This is the lowest among its peers such as Gail, Gujarat Gas and Indraprastha Gas which command a P/E between 16.5 and 18.5.