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.

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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.