Stock Review: Gujarat State Petronet (GSPL)

Gujarat State Petronet (GSPL) is creating pipeline network within Gujarat in anticipation of rising availability of gas even though its volumes dropped during FY11. While its infrastructure will certainly find greater utilisation and generate higher profits once domestic availability of gas goes up, the lack of clarity on timing remains the key risk.

The company also saw its tariff drop in FY11 to an average . 0.80 per cubic meter from . 0.86 last year. Although a concern, this is unlikely to weaken any further from the current level.

The volume of gas that the company transported also dropped to 35.5 million cubic meters per day (MMSCMD) in the March 2011 quarter from 36.7 MMSCMD in the June 2010 quarter. Over 58% of these volumes came from RIL's KG basin fields during FY11, while one-third came from regassified LNG. However, with the KG basin output dwindling, its share has fallen to around 40%, at present.

The company's 22% jump in FY11 profits, despite lower volumes and falling tariffs, came mainly from a change in depreciation policy. The company changed depreciation rate for pipelines from 8.33% to 3.17% in line with Gail's.

The company is expanding its pipeline network in Gujarat to 2,400 km in FY12 from 1,900 km, at present. The three pipeline contracts it won in consortium with Indian Oil, BPCL and HPCL is set to make it a leading interstate gas transporter from intrastate at present. These three pipelines, with a combined length of 4000 km and capacity of 125 MMSCMD, are expected to get ready within three years at a total cost of . 12,000 crore to be funded by 70:30 debt-equity.

In view of the stagnating domestic gas production, the company is increasingly depending on imported sources. Petronet's expanded capacity provides the key support. Domestic projects — ONGC's KG basin fields and GSPC's Cauvery basin fields — are still years away. This means the company's ability to scale up in the short term may be limited. It is for this reason that the company's valuations seem to be under pressure. GSPL is trading at a price-to-earnings ratio (P/E) of less than 10, against an average of 16.2 for the industry.