Stock Review: Gujarat State Petronet (GSPL)

 

The strong results for June '11 quarter helped Gujarat State Petronet limit its fall as the market tumbled since the last week of July. The company's results were better than expected as its volumes as well as tariffs grew and had the benefit of higher wind power capacity.

In spite of being a mid-cap company, GSPL's shares have weathered the recent market storm fairly well. GSPL's market value dropped 7.5% since the last week of July against a 13% fall in the BSE Sensex. The company has been consistently underperforming the benchmark index over the past one year due to concerns over its stagnating volumes.

In the June '11 quarter, GSPL took its volumes up 1.4% YoY to 36.8 million metric standard cubic meters per day (MMSCMD), which was its highest volume in any quarter. The tariffs for the quarter at . 0.81 per SCM was 6.6% higher against the year-ago period.

The improvement in tariffs was a surprise, considering an expectation of the same easing towards . 0.75/SCM level in the near future once the Petroleum and Natural Gas Regulatory Board (PNGRB) approved final tariffs. In fact, the tariff finalisation for the company may get delayed considering certain legal issues in PNGRB.

The company's operating profit for the June '11 quarter was up 10.1%. Depreciation dropped 34% and other income zoomed 163%, which helped it grow the pre-tax profits by 28% in spite of a 44% jump in interest costs. A 150-basis point drop in effective tax rate to 29.7% helped it end the quarter with 30.7% profit growth at . 137.4 crore.

The company is moving out of Gujarat, where all its transmission activities are currently located to build three long-distance cross-country gas pipelines covering north, central and southeast India. This will bring the company long-term gains.
GSPL is already the lowest valued company in the domestic listed natural gas companies. The company is trading at a price-toearnings multiple (P/E) of just 10 against 14-21 for its peers such as Gail, Gujarat Gas, Indraprastha Gas and Petronet LNG. This could be due to the fact that GSPL's recent profit growth has come primarily from changes in its erstwhile aggressive depreciation policy in December '10 quarter.