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Tariff hike implemented; expenses higher
* Gujarat State Petronet (GSPL) reported a PAT of Rs3.23bn in Q2FY19. It implemented PNGRB’s 28% hike from 1 April; hence, the numbers include Rs1.11bn for Q1FY19. Adjusted PAT was Rs2.44bn, up 38% yoy and 69% qoq. Adjusted revenue was up 45% yoy and 24% qoq at Rs4.87bn, while EBITDA rose 42% yoy and 18% qoq to Rs4.05bn. Net of the tariff hike, revenue came in line though earnings missed due to higher opex.
* Employee costs rose 54% yoy/140% qoq to Rs209mn although ~Rs100mn was due to 2.5 years of arrears from the 7th Pay Commission. Other expenses were also up 71% yoy/58% qoq to Rs612mn, which was due to SUG cost and RIL gas pipeline usage charges. The tax rate in turn was lower at 29% due to tax benefit on Gujarat Gas acquisition debt.
* Gas transmission volumes were down 4% qoq and up 11% yoy at 35mmscmd. The sequential volume drop could be due to lower power sector off-take from the monsoon season. RIL volumes were range-bound at ~10mmscmd. Average book tariff realization was up 28% qoq to Rs1.46/scm, in line with the hike approved by the PNGRB.
* Electricity revenue rose 32% yoy and 21% qqo to Rs165mn, while PBIT was up 61% yoy and 31% qoq at Rs118mn. Electricity capital employed rose from Rs1bn to Rs3.1bn qoq, which may imply a new wind project.
* Headline long-term debt rose from Rs17.6bn as of FY18-end to Rs21.1bn as of 1HFY19- end. Interest, depreciation and other income were slightly off our estimates.
* Management guidance :
Management has stated that the current volumes are hovering around 35-36mmscmd. Volumes of the Mundra LNG terminal would see a gradual rampup, while the Cairn Rajasthan supply ramp-up is also soon expected. The capex for FY19 was mostly done in 1HFY19 itself.
* Outlook and valuation :
We remain positive on GSPL due to the tariff hike and new volume avenues such as Cairn Rajasthan ramp-up and Mundra LNG terminal. We raise our FY19/20 PAT estimate by 11%/5%, building in a lower tax rate due to Gujarat Gas acquisition debt/interest. We rollover our DCF-SOTP valuation to FY21, but maintain our target price at Rs225, applying a higher WACC of 11% and nil terminal growth. Our SOTP valuation includes core business valuation of Rs141/share and Gujarat Gas stake of Rs80/share (30% haircut to FV). We maintain our Buy rating on GSPL.
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