Gujarat State Petronet share price: Sharekhan initiates coverage with BUY call target price Rs 300

Sharekhan initiates coverage on GSPL with Buy rating with target price of Rs 300. Gujarat State Petronet Limited (GSPL), India’s second-largest gas pipeline utility, is likely to see strong traction in gas transmission volumes, led by higher gas offtake (3-5 mmscmd) by revival of stranded gas based power plants. Moreover, the start of the Ramagundam fertiliser plant and GSPC’s LNG contract for 7 cargos could add 4 mmscmd to gas transmission volumes. Robust growth for the city-gas distribution (CGD) space is expected to sustain amid low domestic gas prices and regulatory push to curb pollution.

Additionally, the recently notified unified tariff regulation for gas pipelines is a positive as it would boost volumes in the long term with an improvement in gas penetration. Hence, the long-term gas demand outlook remains robust and we expect an 8%/13% volume/PAT CAGR over FY2021E-FY2023E for GSPL. Strong aggregate FCF generation of Rs 3067 cr over FY2021E-FY2023E (to help GSPL become net debt-free in FY2022E) and decent RoE of 14% makes us constructive on GSPL.

GSPL’s earnings outlook is robust and FCF yield is at 8% yet its valuation is attractive with core pipeline business (excluding market value of GSPL’s investment in Gujarat Gas after assuming 30% holding company discount) is available at just 3.1x FY2023E EPS.

3R Research Positioning Summary:

Right Sector: Structural gas demand drivers, led by regulatory tailwinds and affordable LNG price to drive sustainable volume growth for gas utilities.
Right Quality: Exposure to highest gas consuming state and proximity to LNG terminal (27.5 mtpa) to keep growth above industry levels.
Right Valuation: Valuation of gas utilities at steep discount to historical levels and potential re-rating possible as earnings outlook improves.

Catalysts:

Long-term triggers:

Ramp-up of domestic gas production and increase in gas infrastructure especially LNG terminals Š Government aims to increase share of gas in overall energy mix to 15% by 2025 from 6% currently

Medium-term triggers:

Affordable LNG price to drive gas demand from power and industrial customers

Key Risks:

Lower than expected gas demand from power, fertiliser and CGD due to a spike in LNG prices could impact gas transmission volume. Any adverse regulatory changes in terms of gas transmission tariffs could impact the stock and Delay in volume ramp-up at new LNG terminals.