Multiple triggers ahead for GSPL

Multiple triggers ahead for GSPL

Merger of city gas distribution business, expectations of tariff hike by PNGRB and improving volumes will boost the company’s earnings

Gujarat State Petronet (GSPL) is likely to witness improved financial performance over the next two years due to multiple factors.

One, GSPL’s city gas distribution (CGD) business is expected to be merged with the four companies of Gujarat State Petronet Corporation (GSPC). The merged entity will be named GSPC Distribution Networks (GDNL). The merger, which is likely to be completed in the June 2015 quarter, will boost GSPL’s consolidated earnings per share (EPS) next fiscal. The combined entity will be India’s largest CGD company and deliver about Rs 5-6 per standard cubic meter (scm) of EBITDA going forward. Analysts estimate, GSPL’s 26% stake in the merged entity will add about Rs 3.5-4.2 to GSPL’s consolidated EPS in FY16.

Two, the company management expects that Petroleum and Natural Gas Regulatory Board (PNGRB) could raise tariff by 8-10%. Analysts believe an upward revision of 10% in tariff by PNGRB (order expected in a couple of months) could add about 14% to GSPL’s EPS.

Three, softening LNG prices and higher off-take from Essar Steel, Essar Oil, OPAL, amongst others could boost GSPL’s transmission volumes. Weak transmission volumes (due to subdued demand from industrial segment) have been a key concern for GSPL over the past few quarters. While analysts expect near term pressure to continue, volumes could improve thereafter. Analysts believe volumes could increase from about 23 mmscmd in the December 2014 quarter to about 28 mmscmd over the next two years.

Meanwhile, clearance of gas price pooling mechanism for gas-based power plants in India could act as another catalyst for GSPL and could boost overall volumes, revenues as well as profitability.

“GSPL expects consolidated CGD volume to touch 10 million metric standard cubic meters per day (mmscmd) in 2.5-3 years, implying an incremental EPS of Rs 3.5 for the company, which adds Rs 34 per share to our target price”, write analysts at Emkay Global in a recent note, who have a target price of Rs 151 on the stock.

Most analysts polled by Bloomberg from February this year remain positive on GSPL. Their average target price stands at Rs 131, about 12% higher than Friday’s closing price.

The protection to downside comes from the fact that the stock trades at 1.6 times FY16 estimated book value, which is about 19% lower than its historical average one-year forward price/book ratio of two times.

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