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Volume dip disappoints
We maintain BUY on GSPL post an in-line performance in 4QFY19. We value GSPL’s transmission business using Discounted Cash Flow (DCF) at Rs 119/sh. To this, we add Rs 90/sh as value of its investments in Gujarat Gas, Sabarmati Gas (30% discount to EV/EBTDA valuation) and other investments (at book value) to arrive at the target price of Rs 209/sh.
HIGHLIGHTS OF THE QUARTER
* Gas transmission volume for the quarter was 32.4mmscmd (-5.9% QoQ and -5.1% YoY) as against our estimate of 34.5mmscmd. Volume break-up in mmscmd was: Refinery 13, fertiliser 4, Power 4.2, CGD 7.1 and other 4.1.
* The volume outlook of GSPL shall remain robust owing to (1) The sole right to transmit regasified gas from Gujarat State Petroleum Corporation (GSPC) -Adani’s 5mmtpa LNG (equivalent to ~18mmscmd of natural gas at 100% utilisation) terminal at Mundra, (2) The near completion of Petronet LNG’s Dahej terminal expansion to 17.5mmtpa from 15mmtpa.
* Blended transmission tariff was Rs 1,464/tscm (+2.9% QoQ and +30.0% YoY) 2.0% higher than our estimate. The company had sought relief from the board to modify the tariff by duly considering various amounts that were overlooked earlier and revise the same to Rs 64.7/mmbtu from Rs 34/mmbtu for HP pipeline and Rs 9.39/mmbtu from Rs 4.08/mmbtu for LP pipeline. However, PNGRB recently rejected this petition saying that the final tariff is determined based on certain regulations and by considering inputs submitted by the company. Thus, there is no revision in tariff and the company will continue to charge tariffs as per the final order. Our assumptions are on the basis of the tariff finalised by the board in Sep-18.
* GSPL announced a final dividend of Rs 2/sh (payout ratio of 14%). We expect the ratio to rise given the strong cash slows of the company.
* Near term outlook: Optimal utilisation of petcoke gasification plant of RIL will reduce volumes for GSPL. but ramp in utilisation of Mundra LNG terminal and completion of expansion at Dahej terminal of Petronet LNG will recoup for it.
We like the GSPL owing to (1) robust volume outlook on back of strong demand from CGD entities and the power sector due to benign LNG prices (2) smoothening in cyclicality of its earnings post acquisition of controlling stake in Gujarat Gas (3) steady cash flow (FCF of Rs 32.28 bn over FY20-23E) from transmission business which will turn the company’s position to a net cash one.
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