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Published on 20/09/2019 10:00:38 AM | Source: Equirus Securities Ltd

Update On Gujarat State Petronet Ltd by Equirus Securities

Near term volumes to remain strong ― maintain LONG

Gujarat State Petronet (GSPL) reported record-high volumes of 38.2mmscmd in 1QFY20, but EBITDA growth at 17% was a miss owing to higher cost items. Volumes are expected to remain high with (1) higher volumes consumed by CGD, (2) current spot LNG prices of ~US$ 4/mmbtu driving gas demand from the power sector, and (3) increased offtake from Cairn India (from 1.5mmscmd to 2.5-3mmscmd). GSPL’s core business is trading at 9x FY20E P/E, but earnings CAGR would be in mid-single digits given flattish volumes likely in FY20. Maintain LONG with a SOTP-based Sep’20 TP of Rs 243 (Jun’20 TP: Rs 222) with core business valued at 11x P/E and investment value in CGDs at Rs 70/sh.

 

CGD & power drive record-high volumes: GSPL’s volumes stood at a record 38.2mmscmd, up 5% yoy and 2% above EE, driven by strong demand growth from the CGD and power sectors. RIL has reduced its LNG offtake on full utilization of its petcoke gasifier, pulling down volumes for GSPL, even as volumes have normalized in Q1FY20.

 

Why operating leverage not playing out? The last few quarters have seen several oneoffs in both cost and revenue items, including a sharp increase in revenue-neutral gas transmission costs, salary hikes and greater compressor costs. We think EBITDA/scm is a better measure to gauge the impact of a sharper tariff hike (28% in ~90% of volumes) and operating leverage. In FY19, EBITDA/scm improved to Rs 1.22/scm vs. ~1/scm in FY18, a growth of ~22% yoy; however, in Q1FY20 it tapered down to Rs 1.14/scm despite recordhigh volumes. We think EBITDA/scm should move up in the coming quarters on (1) normalization of some costs, and (2) full tariff imposition on torrent power volumes.

 

Raising volume estimates to ~38mmscmd: Any expected fall in RIL volumes was/would be mitigated by (1) a 2.5-3.5mmscmd increase in Morbi volumes, and (2) ~1.2mmscmd higher UNOSUGEN torrent power volumes. We estimate RIL volumes to reduce to 5mmscmd by H2FY20 and thus build volumes of ~38.3mmscmd each for FY20E/FY21E, representing a 5% volume CAGR. In case of no decline in RIL volumes (spread between LNG & petcoke), we could see volumes of 40-42mmscmd for GSPL in the remaining quarters.

 

EBITDA growth on higher transmission tariffs: EBITDA growth of 17% yoy to Rs 4bn was below EE and impacted by higher employee costs (+47% yoy) and other expenses which grew 152% yoy due to

(1) higher gas transmission charges (up ~2x yoy) and its revenue neutral cost, and

(2) higher SUG (~Rs 130mn losses vs. Rs 60mn gains in 1QFY19) and compressor costs.

PAT growth of 43% was boosted by

(1) a reduction in interest costs to Rs 479mn, down 17% yoy, as debt levels declined by ~Rs 3.6bn,

(2) a 40% yoy growth in other income to Rs 77mn, and

(3) normalization of tax rate at 34.1% vs. 41.4% in the base quarter.

 

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