Buy Gujarat State Petronet; target of Rs 174: ICICI Direct

Natural gas transmission volumes marginally declined 1% QoQ to 24.6 mmscmd in Q2FY17 vs. our estimate of 25.6 mmscmd. However, going forward, we expect higher demand from gas consuming sectors due to 18% reduction in APM gas prices to $2.8/mmbtu. Also, the modified long-term Petronet-RasGas deal at the end of Q3FY16 lifted sentiments across the sector. Recently, spot LNG prices have risen due to approaching winter season and reached $7/mmbtu levels. However, we believe spot prices would continue to remain subdued on a longer term basis due to increasing LNG global capacity and lagging LNG demand. Dahej LNG terminal has fully commissioned its 5 MMTPA terminal in October and is expected to ramp up with additional LNG volumes, which will benefit GSPL, going forward. Also, the expected commissioning of the 5 MMTPA Mundra LNG terminal in FY18E would lead to additional volumes. We estimate volumes at 25.9 mmscmd, 28.5 mmscmd and 29 mmscmd for FY17E, FY18E and FY19E respectively.

GSPL’s transmission business is expected to report steady volume growth in the backdrop of subdued gas prices and renegotiated LNG supplier contracts. Higher growth in domestic power demand due to favourable reforms, increased LNG capacity and lower gas prices would also add to incremental volumes, going forward. An upward revision of transmission tariffs by PNGRB in coming months would be a key positive for the stock. GSPL’s investments in CGD entities like Gujarat Gas (25.8% stake) and Sabarmati Gas (27.5%) would also create value for investors in future. We value GSPL’s investments at Rs 32/share. Subsequently, we value GSPL on an SOTP basis and arrive at a target price of Rs 174.