In an interview to CNBC-TV18 Jal Irani, Sr VP - Wholesale Capital Markets, Edelweiss Financial Services shared his reading and outlook on Gujarat State Petronet (GSPL)
The stock hit a fresh 52-week high today after the appellate tribunal for electricity or Aptel ruled in the favour of the company in the PNGRB case. The PNGRB has been asked to revise the tariff upward for GSPL's high pressure Gujarat Gas Grid.
Below is the transcript of Jal Irani's interview with Reema Tendulkar and Ekta Batra on CNBC-TV18.
Reema: First let us talk about GSPL and the APTEL ruling. We do not know the quantum of tariff hike, what according to you will be the appropriate tariff increase in the case of GSPL and what impact will it have on the company’s financials?
A: I am afraid no one knows that as yet and it is a rather complex calculation. However, to put things into a bit of perspective, tariffs for GSPL used to be in excess of Rs 45 and that has come down to about Rs 26.5.
In July this year, 2014, they already got an increase of 11 percent and even after that it is only about Rs 26.5. Will they go back to an excess of Rs 45? It is difficult to say; I can only wonder. However, more importantly the nature of the gas transmission business is that it is a very significant fixed cost business.
Essentially, any tariff increase significantly goes to the bottomline. So, even a 10 percent odd increase in tariff actually increases profits by about 20 percent. So, it is a fairly significant leverage. While we don’t know the exact tariff hike it could be material nevertheless.
Ekta: How would you extend this to other companies within the same space? Is there any sort of analysis which you might have done for peer companies to GSPL?
A: Gas Authority of India (GAIL) sits in the same space. Essentially, the whole regulatory environment came into place from 2008 and GSPL and GAIL have been largely in the same bucket. A lot of these tariffs were revised retrospectively in the case of GAIL from 2008 and in the case of GSPL also initially from 2008 and subsequently from 2012.
So, our understanding is that there is a similar case up in the tribunal with GAIL. This GSPL’s winning this case sets a precedent so one would think that the ruling in the case of GAIL may also be favourable. This is entirely speculating at this stage but that could be a positive sentiment driver.
Notably while GSPL is predominantly a pure play in the space, GAIL has got significantly greater profits coming from the likes of LPG, petrochemicals and even gas trading. So, it’s the leverage to its bottomline while still reasonably material is unlikely to be as much as that for GSPL basically.
Reema: How soon do you think PNGRB will take a decision on whether to hike tariffs or not, how soon would we know and if it does hike it say initially by a 10 percent will it rerate stocks like GSPL as well as GAIL immediately?
A: From the perspective of rerating we have already seen a bit of that happen. I have no doubt that there will be a further rerating especially for GSPL where the magnitude of the profit increase could be much more significant. When would the tariff hike be calculated and announced by PNGRB, I am afraid that is difficult to say.
What I think nevertheless that it is likely to be a lot sooner than has been in the past. So, if you look at some of the tariff changes that have come about in the past actually the tariffs effective 2008 some of them have got announced literally a quarter back. I am sure it is not going to take another 5-6 years for this revision to take place. So, I am quite sure it is going to be lot faster than that. So, is it going to be in the next month, is it going to be in the next six months? Honestly difficult to say.
Ekta: I wanted to move away from this whole GSPL case and wanted to talk about a couple of other stocks. You have a buy on Cairn India, it has underperformed quite significantly as compared to the oil stocks, it is down 15 percent on a year-to-date (YTD) basis possibly because of lower crude prices which have affected Cairn but in your sense what would be the trigger for Cairn and maybe a target price and what makes you bullish on Cairn India?
A: Essentially Cairn is cheap valuations and oil play. Cairn perhaps in the Asian space among the larger company the only pure play or the one which is sensitive to oil prices, so having fallen so much on the back of crude oil – that is a clear sensitivity. It quotes on a PR of barely five times, in fact even lower. So our target price is in the region of about Rs 340. It is not a top pick. It’s purely a value play but it’s not a top pick in this space.
Reema: If you had to recommend a buy on any of the oil and gas stock that you track at current levels, which one would you recommend?
A: Bharat Petroleum Corporation (BPCL) remains our all time favourite. We believe that the stock has done well on the back of reforms but the true earnings kicker from the reforms are still poised to show the diesel deregulation and also from a longer term perspective. It has got superior strategies to enhance profitability more than some of the others in this space. So BPCL by far is the best quality play.
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