Gujarat State Petronet Ltd. (GSPL) is the 2nd largest natural gas transmission company in India with ~1700kms pipeline network that forms the backbone of Gujarat’s gas infrastructure. GSPL operates on open access basis and currently transports ~36mmscmd of natural gas (58% of total consumption in Gujarat).

Play on Gujarat’s industrial growth

Gujarat, accounts for 40% of India’s natural gas consumption(62mmscmd) and is known as gas capital of India. Monopolistic nature of pipeline business coupled with robust industrial growth in the state promises increasing volume for GSPL. Gujarat government’s initiatives to attract further investments in the state augur well for GSPL with improving NG supply scenario in India.

Risk free transmission model

GSPL is a pure transmission company and does not take the title for the gas it supplies, which keeps it isolated from commodity price risk. The pipeline tariffs are based on “Take or Pay” basis and provide revenue visibility.

Future drivers – Cross country pipelines

GSPL has planned a capex of ~Rs18bn from FY11 to FY13 to increase its current network to ~2400 kms covering the entire Gujarat. It intents to expand outside Gujarat and has submitted an Expression of Interest (EOI) for laying four trunk pipelines(together 5675kms). Two of these Mehsana-Bhatinda (1670kms) and Mallavaram-Vijaipur-Bhilwara (1585kms) are awarded to GSPL.

Concerns over tariff and GSEDS

Final tariff guideline for GSPL is awaited and any negative surprise may dent our profitability. As guided by the management, we have not incorporated any contribution for GSEDS. Any provisioning in future will decrease our earnings estimate substantially.

VALUATIONS AND RECOMMENDATION

At the CMP of Rs100, the stock is trading at P/E of 11.3 & 9.6 and EV/EBITDA of 7.1x and 6.1x respectively for FY12 and FY13. We initiate coverage on GSPL with a ‘BUY’ recommendation and a price target of Rs130 based on DCF (upside +30%) with a 12 month time horizon.

BACKGROUND

GSPL, a Gandhinagar (Gujarat) based player, was established by Gujarat State Petroleum Corporation Limited (GSPC) in Dec’98 for the purpose of constructing and managing a statewide gas transmission network. The company commenced transporting natural gas in Nov’00 with the commissioning of Hazira-Mora section. From 14kms pipeline in FY01, it has expanded to operate approximately 1,700 kms of natural gas pipeline grid connecting Hazira-Vadodara- Ahmedabad-Kalol-Himmatnagar-Mehsana-Rajkot-Morbi-Anjar-Jamnagar. It is currently transporting about 36mmscmd of natural gas out of the 62mmscmd which is the total amount of natural gas being transported by pipelines for consumption in Gujarat.

GSPL is connected to all the major Natural Gas supply sources in Gujarat including designated collection points near the natural gas fields of Cairn Energy, GSPC and GSPCNIKO, all located in Hazira, the Hazira LNG terminal, and the Petronet LNG terminal located in Dahej. The company has constructed spur lines that connect to the land fall point of gas from Panna Mukta Tapti located in Hazira and tap-off point on the GAIL’s HBJ pipeline, which in turn connects to the RIL’s East-West pipeline transporting NG from KG basin.

The customers of GSPL comprise of industries such as power (~45%), fertiliser (15%), steel(15%), chemical plants and local distribution companies (25%). The company plans to expand its network to cover entire Gujarat targeting ~2400kms (capacity of 55-60mmscmd) of pipeline network in the next 2years. In attempt to increase its operations beyond Gujarat geographies, GSPL in the consortium (GSPL-52%, IOC-26%, BPCL-11%, HPCL-11%) submitted 4 EOIs (Grid Length – 5,675 kms) to PNGRB for extending its Natural Gas transmission System across the country. Two of these pipelines (~3,200 kms) are awarded to GSPL which is expected to get commissioned by FY15.

COST STRUCTURE

As GSPL is a pure transmission company, it does not assume title of natural gas. As operating costs form only 6% of net sales, it is insulated from any operating cost variations. As a result, operating margin for GSPL has been very high (94% as on 2010). Being a capex intensive business, depreciation cost forms the largest component of expenditure followed by interest cost.