Buy Gujrat State Petronet; target of Rs 184: Edelweiss

Edelweis's research report on Gujrat State Petronet

Gujarat State Petronet (GSPL) delivered subdued Q2FY17 with EBITDA at INR 2,262mn (down 3% QoQ, flat YoY), 3% below estimate. Earnings miss was on account of 5% lower than expected volumes at 24.6mmscmd, while tariff was in line at INR 1.1/scm. Sequential fall in volumes, despite PLNG’s Dahej terminal expansion, could be attributed to the temporary lower off take from refining segment. Management indicated that volumes have recovered in Q3FY17 as spot LNG prices have moderated after recovering in Q2. We expect GSPL’s volumes to benefit from PLNG’s recent expansion (parent GSPC has already booked 2.25mmt) and 2017 commissioning of Mundra LNG terminal. A favourable tariff order is expected shortly, which will be effected from FY18. We estimate 3%/5% volume growth in FY17/18 owing to higher demand from city gas on improving gas economics and higher off-take from incremental PLNG capacity, and expect 12% tariff hike in FY18. Maintain ‘BUY’.

GSPL transmits 20% of its volumes to Reliance Industries’ (RIL) Jamnagar refinery. With gradual commissioning of RIL’s petcoke gasification unit in FY18, we expect the company’s off-take to fall gradually. However, demand from city gas will more than offset the dip. We forecast 9%/17% EPS growth in FY17/18. On steady volumes and higher tariffs, we reiterate ‘BUY/SO’ with a DCF-based target price of INR 184.