Gujarat State Petronet is likely to emerge as a key beneficiary of rising availability of natural gas in the country. This makes it an attractive investment in the long term
GUJARAT STATE Petronet (GSPL) is India's only company that transmits natural gas for its clients without trading in it. The company's longterm contracts with Torrent Power and Reliance Industries (RIL) for transmission of natural gas are likely to become effective in the March 2009 quarter, which will boost its profits substantially.
BUSINESS:
GSPL's 1,130-km pipeline network is spread across the state of Gujarat and connects natural gas producers on the west coast of Gujarat to their clients in nearly 33 districts of Gujarat. Some of GSPL's prominent clients are Gujarat Power, Essar Steel, Essar Power, Arvind Mills, GNFC and GSFC. The company operates its pipeline network on an open access basis and is not involved in buying and selling gas.
GROWTH FACTORS:
Presently, GSPL transports about 17 million metric standard cubic metres of gas a day (MMSCMD), which will double once its contracts with RIL and Torrent Power become effective. GSPL has signed a 15-year agreement with RIL to transport 11 MMSCMD and another contract with Torrent Power to transport 4.5 MMSCMD for 20 years. Torrent Power's 1,147.5 MW Sugen power plant is scheduled to commence operations in the quarter ending March 2009. In the same quarter, RIL is also slated to start production of natural gas from the KG basin. The company is extending its pipeline network to 2,000 km by 2010 at a capex of Rs 1,900 crore. With the Petroleum and Natural Gas Regulation Board (PNGRB) now in place, the company will get competitive advantage while bidding for new projects in the adjacent areas. GSPL's return on capital is low at present. So, there is little risk that GSPL will have to reduce transport tariffs in future. GSPL also holds strategic stakes in gas distribution companies in three cities-two in Gujarat and one in Andhra Pradesh. Over the next two years, the availability of natural gas in India is expected to double. Apart from RIL's gas, Petronet LNG's project to double its regassification capacity to 10 million tonnes per annum is likely to be completed in January 2009.
FINANCIALS:
The natural gas transported by the company grew 17% from 14.6 MMSCMD in FY '07 to 17.1 MMSCMD in FY '08 but has stagnated since then. This is mainly due to the stagnation in the availability of natural gas and situation is likely to improve in the near future. The company has consistently increased its revenues per unit of gas transported. The company is currently carrying a debt of around Rs 1,200 crore at an average cost of 9.5%. The company has been consistently generating healthy cash flows from operating activities.
Being capital intensive, interest and depreciation are the most important costs for the company, which grew at a CAGR of 33.7% and 42.3%, respectively, in the last five years. During the same period its net sales grew at a CAGR of 31.4% and pre-tax profit grew at 70.3%.
GSPL currently assumes 12 years of working life, which increases the annual depreciation charged on its pipelines compared to 30 years working life assumed by India's largest gas transporter GAIL. This indicates the need to examine GSPL's cash profits rather than its book profits for its valuation. The company's cash profits have grown at a CAGR of 58.6% in last five years.
VALUATIONS:
The company is likely to post a 21% increase in its gas volumes in the second half of FY '09 to 20.6 MMSCMD. This will drive its H2 FY '09 revenues 36% up on y-o-y basis to Rs 309 crore. The net profit for the period is expected to go up 40% to Rs 91.8 crore. As a result, the company is expected to end FY '09 with an EPS of Rs 2.7 and cash EPS of Rs 5.8. The current price of Rs 34.8 translates this to a P/E of 12.7 based on book EPS and just 6, if we consider the cash EPS.
KEY RISKS:
The company is currently conducting a postal ballot seeking shareholders' view to contribute 30% of pre-tax profits for social development as requested by the chief minister of Gujarat. Presently, 50.2% of the company's equity capital is held by five companies, which are controlled by the Gujarat State government. The company's EPS will erode proportionately, if its shareholders accept the resolution.
GUJARAT STATE Petronet (GSPL) is India's only company that transmits natural gas for its clients without trading in it. The company's longterm contracts with Torrent Power and Reliance Industries (RIL) for transmission of natural gas are likely to become effective in the March 2009 quarter, which will boost its profits substantially.
BUSINESS:
GSPL's 1,130-km pipeline network is spread across the state of Gujarat and connects natural gas producers on the west coast of Gujarat to their clients in nearly 33 districts of Gujarat. Some of GSPL's prominent clients are Gujarat Power, Essar Steel, Essar Power, Arvind Mills, GNFC and GSFC. The company operates its pipeline network on an open access basis and is not involved in buying and selling gas.
GROWTH FACTORS:
Presently, GSPL transports about 17 million metric standard cubic metres of gas a day (MMSCMD), which will double once its contracts with RIL and Torrent Power become effective. GSPL has signed a 15-year agreement with RIL to transport 11 MMSCMD and another contract with Torrent Power to transport 4.5 MMSCMD for 20 years. Torrent Power's 1,147.5 MW Sugen power plant is scheduled to commence operations in the quarter ending March 2009. In the same quarter, RIL is also slated to start production of natural gas from the KG basin. The company is extending its pipeline network to 2,000 km by 2010 at a capex of Rs 1,900 crore. With the Petroleum and Natural Gas Regulation Board (PNGRB) now in place, the company will get competitive advantage while bidding for new projects in the adjacent areas. GSPL's return on capital is low at present. So, there is little risk that GSPL will have to reduce transport tariffs in future. GSPL also holds strategic stakes in gas distribution companies in three cities-two in Gujarat and one in Andhra Pradesh. Over the next two years, the availability of natural gas in India is expected to double. Apart from RIL's gas, Petronet LNG's project to double its regassification capacity to 10 million tonnes per annum is likely to be completed in January 2009.
FINANCIALS:
The natural gas transported by the company grew 17% from 14.6 MMSCMD in FY '07 to 17.1 MMSCMD in FY '08 but has stagnated since then. This is mainly due to the stagnation in the availability of natural gas and situation is likely to improve in the near future. The company has consistently increased its revenues per unit of gas transported. The company is currently carrying a debt of around Rs 1,200 crore at an average cost of 9.5%. The company has been consistently generating healthy cash flows from operating activities.
Being capital intensive, interest and depreciation are the most important costs for the company, which grew at a CAGR of 33.7% and 42.3%, respectively, in the last five years. During the same period its net sales grew at a CAGR of 31.4% and pre-tax profit grew at 70.3%.
GSPL currently assumes 12 years of working life, which increases the annual depreciation charged on its pipelines compared to 30 years working life assumed by India's largest gas transporter GAIL. This indicates the need to examine GSPL's cash profits rather than its book profits for its valuation. The company's cash profits have grown at a CAGR of 58.6% in last five years.
VALUATIONS:
The company is likely to post a 21% increase in its gas volumes in the second half of FY '09 to 20.6 MMSCMD. This will drive its H2 FY '09 revenues 36% up on y-o-y basis to Rs 309 crore. The net profit for the period is expected to go up 40% to Rs 91.8 crore. As a result, the company is expected to end FY '09 with an EPS of Rs 2.7 and cash EPS of Rs 5.8. The current price of Rs 34.8 translates this to a P/E of 12.7 based on book EPS and just 6, if we consider the cash EPS.
KEY RISKS:
The company is currently conducting a postal ballot seeking shareholders' view to contribute 30% of pre-tax profits for social development as requested by the chief minister of Gujarat. Presently, 50.2% of the company's equity capital is held by five companies, which are controlled by the Gujarat State government. The company's EPS will erode proportionately, if its shareholders accept the resolution.
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