GUJARAT STATE Petronet (GSPL) is India’s only company that transmits natural gas for its clients without trading in it. It has set up a 1,130-km-long natural gas pipeline network connecting various districts in Gujarat, which is India’s largest natural gas producing and consuming state. GSPL is expanding its pipeline network aggressively, which has put pressure on its financial performance due to a rise in interest and depreciation costs. However, the current investments will pay off well once more natural gas becomes available and the capacity utilisation improves. With the availability of natural gas slated to double in the next three years, GSPL will emerge as a key beneficiary. Long-term investors can consider investing in the scrip.
BUSINESS:
GSPL covers nearly 33 districts of Gujarat and its clients include Gujarat Power, Essar Steel, Essar Power, Arvind Mills, Gujarat Narmada Valley Fertilizers and Gujarat State Financial Corporation. The company operates its pipeline network on an open-access basis, which means that the transmission capacity is available to all shippers without discrimination. Since the company is not involved in buying and selling gas, it’s not exposed to fluctuations in commodity prices.
GROWTH FACTORS:
GSPL has an aggressive capital expenditure (capex) plan to invest Rs 1,900 crore by ’10 to take the pipeline network to 2,000 km. This will connect a number of gashungry industrial centres to the gas grid, bringing in more business for GSPL. With the natural gas regulator — Petroleum and Natural Gas Regulation Board (PNGRB) — becoming active, the wider reach of these pipelines will assume further significance. PNGRB will not allow GSPL’s competitors to lay parallel pipelines and the company will hold competitive advantage while bidding for new projects in adjacent areas.GSPL’s return on capital employed (RoCE) has remained at reasonable levels of 10-11% in the past couple of years. This is below the 12% RoCE allowed by PNGRB under its guidelines. Thus, there is hardly any risk of GSPL having to reduce transport tariffs in future.
GSPL transports around 17 million metric standard cubic metres of gas a day (mmscmd), but this will double with volumes from two contracts it signed recently. GSPL has signed a five-year agreement with Reliance Industries to transport 11 mmscmd and another contract with Torrent Power to transport 4.5 mmscmd for 20 years. Both these contracts are set to commission by the second half of the current fiscal itself, which will significantly improve the capacity utilisation of GSPL’s pipeline network. Over the next three years, the availability of natural gas in India is expected to double. RIL’s natural gas from the KG basin is expected to start flowing from the second half of ’08. Similarly, Petronet LNG’s expansion project is likely to finish by December ’08, doubling its regasification capacity to 10 million tonnes. Gujarat State Petroleum (GSPC) and ONGC are developing their gas fields on the eastern coast of India, which are likely to start flowing in ’10 onwards. All these will increase the availability of natural gas in Gujarat.
GSPL also holds strategic stakes in three city gas distribution companies — two in Gujarat and one in Andhra Pradhesh, which offer a natural and lucrative diversification opportunity to the company.
FINANCIALS:
The company has witnessed healthy growth during the recent quarters. However, the spurt in interest and depreciation costs on completion of the pipeline projects has impacted its net profits.
The company is charging depreciation onits pipelines at a higher rate, assuming just 12 years of working life. However, the lifetime of the pipelines is estimated at 30 years, which gives it an option to bring down the rate of depreciation any time in future. In fact, in the quarter ended September ’05, India’s largest gas transporter Gail had cut the depreciation rate to 3.17% from earlier 10.34%. A similar depreciation rate cut, if implemented, will boost GSPL’s net profit.
For the 12-month period ended December ’07, the company reported a 2.8% fall in net profit, despite a 35% jump in operating profit, as interest and depreciation costs soared. The volume of gas transported has increased steadily to cross 16.9 mmscmd for the 12-month period ended December ’08.
VALUATIONS:
As the contracts with RIL and Torrent Power become functional in the next 4-5 months, the natural gas volumes transported by GSPL are expected to double. This will bring in additional revenues, with the margins remaining intact. The interest and depreciation costs may rise as and when new pipelines get commissioned. However, for the year ending FY09, we expect the company to report earnings per share of Rs 2.1 and cash earnings of Rs 5.6 per share. Thus, at the current market price of Rs 67, the scrip is trading at a one-year forward P/E of 31.9. However, based on cash profits, the forward P/E works out to just 12.
Considering the aggressive depreciation policy adopted by the company, its real value is reflected by the growth in its cash EPS. Hence, for long-term investors, the scrip offers attractive returns.
Beta: 1.2
Institutional Holding: 29.8%
Dividend Yield: 0.75%
P/E: 47.8
M-Cap: Rs 3,760 cr
CMP: Rs 66.90
ALL PIPED UP
GSPL operates a 1,130-km pipeline network, connecting over 33 districts in Gujarat on an open-access basis
The company is investing Rs 1,900 crore over the next two years to nearly double its pipeline network
GSPL has firm contracts with RIL and Torrent Power, expected to become functional over the next few months, which will double the company’s volumes An improvement in the availability of natural gas in Gujarat will help it improve capacity utilisation
GSPL, which currently serves only bulk customers, is also investing in city gas distribution projects for future growth A substantial rise in interest and depreciation costs have pressurised GSPL’s profitability, but current investments will pave the way for future profitability The institution of a natural gas regulator in India is likely to benefit GSPL, as it will ensure that the company enjoys exclusivity rights on its existing & planned networks
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