Vol.

2/09-10
April 24, 2010

Buy
Analyst:

Abhishek Gupta
Gujarat State Petronet Limited
abhishekg@bajajcapital.com

Reviewed by: Gujarat State Petronet Limited (GSPL), a GSPC Group company is a
Alok Agarwala pioneer in developing energy transportation infrastructure and
aloka@bajajcapital.com
connecting natural gas supply basins and LNG terminals to growing
markets. GSPL is expanding its pipeline network in Gujarat to reach the
Investment Details
demand centres by laying gas pipeline network. The company has
CMP (Rs.) 93.5
developed requisite expertise and confidence with proven project
Target (Rs.) 116.4
management competencies.
Upside Potential (%) 24.5%
GSPL is first Pipeline Company in India operating on open access basis
Horizon (Months) 10-12 M
and is a pure transmission network player. The transmission network of
the company envisages development of systematic and seamless
pipeline network across Gujarat connecting various suppliers and users.
The suppliers of natural gas include traders, producers and LNG
terminals. The users comprise industries such as power, fertilizer, steel,
Profile
chemical plants and local distribution companies.
Industry Gas
Transmission
Market Cap (Rs cr.) 5256.1
GSPL has 1420 kms of gas pipeline in operation from Hazira-Vadodara-
Ahmedabad-Kalol-Himmatnagar-Mehsana-Rajkot-Morbi-Anjar-
Face Value (Rs.) 10
Jamnagar. It transports more than 36 MMSCMD of gas currently. It has
52-week high/low (Rs.) 104.9/38.5 450 kms of gas pipeline under execution and has given 4 EOIs to
Book Value (Rs.) 21.6 Petroleum and Natural Gas Regulatory Board (PNGRB) for extending its
Price / Book Value 4.3 Natural Gas Transmission System across the country Grid Length - 5675
PE Ratio (TTM) 15.4 Kms.
Dividend (%) 7.5 KEY INVESTMENT ARGUMENTS
Average Daily Volume 941713
(1Year)
Strong compounded growth

GSPL has grown strongly over the years (28.3%) annual growth in net
sales from 2004 to 2009 to Rs 487.5cr, and 188.6% annual growth in net
Net Sales (Standalone) profits to Rs 123.4cr), primarily driven by increased gas transmission
2500 volumes.
Though 2009 sales and profit growth (16.7% and 23.5%, respectively)
2000
were lower than average primarily due to user substitution of spot
1500 natural gas by cheaper naphtha for some part of the year, growth has
recouped strongly in FY10.
1000
16081435
500 1216 Strong Q3FY10 results driven by Increase in Gas volumes
841
279 508
0 Having witnessed dwindling volumes throughout last fiscal due to
04' 05' 06' 07' 08' 09' 10E'
variety of reasons, GSPL has given strong results for its last two
Source: Company data. Figures in Rs. Cr.
quarters. Its third quarter revenues stand at Rs. 268.5cr, a growth of
FY 10E’ data is for 9 months & is annualized. 128.6% over previous year. Profits too went up to Rs. 115.4cr as against
Rs. 27.6cr over similar period. Profit margin remains robust at 42.97%
versus 23.54% in the previous year. Growth in the revenues came on
the back of increase in volume of supply of Gas to 34.8 mmscmd as
 Stock idea – Gujarat State Petronet Limited

Adj. Net Profits (Standalone)

450
400 against 13.1mmscmd in the same quarter of previous year. Volumes
350 during the quarter were boosted by gas from KG basin and higher LNG
300 volumes.
250 The first nine months of this fiscal saw sales more than double, and
200 profits more than treble over the previous year. This was primarily due
150 306
to a sharp uptick in volumes transported which grew 96% over the
100
previous year to 8,395 million metric standard cubic meters. Higher
50 89 100 123
47 volumes also lead to the improvement of the operating margin of the
0 2
04' 05' 06' 07' 08' 09' 10E' company which stood at 96.46% for the fist nine months compared to
93.24% in the previous year.
Source: Company data. Figures in Rs. Cr.
FY 10E’ data is for 9 months & is annualized.
Gradual increase in the Gas Supply
GSPL saw its total supply coming from - 65% was sourced from RIL D6,
23% from Petronet and rest was from Niko, Cairn, GSPC and Shell.
Consumption from RIL refinery is gradually increasing, currently the
200.0
PBIDT
supply to RIL refinery is 8.75 mmscmd which is expected to increase to
180.0
160.0 11 mmscmd in Q4FY10. With an increase in the gas production from
140.0 the current level of 63-64 mscmpd to the peak of 80 mscmpd by RIL in
120.0 the near future, there is still lot of scope left for GSPL to increase the
100.0
80.0
volume of gas transported.
60.0 116.1 125.0 ONGC and GSPL too are likely to commence gas production in 2-3 years.
40.0 73.9 68.9 This will give further boost to the GSPL Gas volumes.
20.0 43.6
0.0
FY06 FY07 FY08 FY09 9MFY10 Expansion plan
Natural Gas industry has entered in the high investment phase in order
Source: Company data. Figures in Rs. Cr. to create infrastructure to handle increase in volumes. Domestic gas
FY 10E’ data is for 9 months & is annualized. availability of natural gas has increased by more than 50% in the past
10 months to 175mmscmd. With an expected exponential increase in
the Gas production in next five years, GSPL has planned an investment
of Rs.1500cr in FY11. It plans further expansion of 800 km of pipeline of
which 450km is under execution. Gana-Hadala (82km) and Morbi-Anjar
30.0 (182km) will be commissioned in the near term, however, Darod-
PBIDTM %
25.0
Jafrabad is likely to be commence operation by Q1 FY11.

20.0 New Pipeline bid

15.0 GSPL has submitted Expression of Interest (EOI) with PNGRB for the
10.0
23.0 construction of 5600km of pipeline outside the state of Gujarat. A
17.3 17.7 successful bid for any new pipeline will increase the scalability of
14.9
5.0 11.0
operation beyond Gujarat.
0.0
FY06 FY07 FY08 FY09 9MFY10
EOI for Pipelines outside Gujarat Length (km)
Mehsana - Bhatinda 1670
Source: Company data. Figures in Rs. Cr. Bhatinda - Jammu & Srinagar 740
FY 10E’ data is for 9 months & is annualized. Mallavaram - Vijaypur - Bhilwara 1585
Surat - Paradeep 1680

Volume Driven Play

The company enters into a gas transmission business with the clients,
engaged in the business of transmission of gas thereby insulating itself
from change in the gas prices. Therefore it’s purely a volume play
where in higher gas supply will lead to higher revenues.

Bajaj Capital Centre for Investment Research 2/6

 Stock idea – Gujarat State Petronet Limited

Shareholding pattern Lower Business risk Model

GSPL has high capex and lower operating cost model. Its agreement
with RIL and torrent power is based on Take – or - pay clause which
11.01 means if the second party i.e. the supplier fails to transmit gas as per
4.65 the agreement, the first party (GSPL) can claim capacity charges.
Capacity charges forms nearly 90% of the tariffs.
37.8
13.67 Key Concerns

Entry into non core business

GSPL has received share holders approval to enter into Wind power
23.02
project business. GSPL will invest Rs.325cr in FY10 and FY11. The
company has no prior experience in the Power business therefore there
is an execution and operational risk involved in the business though
Promoter Public FII DII Government
Gujarat State Petroleum Corporation (GSPCL), the parent company of
GSPL, has an existing wind power project of 52.5 MW in the Kutch
district of Gujarat which was supplied, set-up and operated by Suzlon
since July, 2009.

GSEDS Contribution

As per Gujarat Government’s 2008 directive to all state PSUs to

contribute 30% of Profit before tax to Gujarat socio economic
development society (GSEDS). However it was not adhered by the state
PSUs in FY09 as IT department didn’t approved IT benefits on such
contribution therefore there is an assumption that no such contribution
will be made in future.

Investment Rationale
GSPL is going to be a key beneficiary of improving gas supplies in the
country on account of increase in domestic gas production. It is also
likely to benefit due to its location advantage in a state which is one of
the most industrialised state in the country. The volume growth based
model is expected to do well with Reliance, ONGC and GSPC likely to
commission more Gas operations from KG basin. With the company’s
intention to expand beyond Gujarat, the concern related with
scalability issue will too get addressed. It has already filed EOI for four
pipelines.

Bajaj Capital Centre for Investment Research 3/6

Net Sales
 
Other
Networth
Total
Total
%Total

PBIDT
G
W
H
T
A
P
O
S
E
I
K
N
U
R
FINANCIAL STATEMENTS:

Share Income
Capital
Income
TotalExpenditure
Income
Expenditure
of Sales
Revenues
PBIDT
EBITDA
Other Margin
Interest
APAT
PBDT
Income%

Operating Cash Flows

Free Cash Flows
Depreciation
Dividend %
PBT
CEPS (Rs.)
Tax
EPS (Rs.)*
Adjusted PAT
Debt-Equity Ratio
NPM
RoNW %
(%) Coverage Ratio
Interest
9M
SWOT Analysis

VALUATION

268.5
200912 200903
3.3
562.3
 
271.8
746.8
15.4
38.7
5.8
734.1
253.1
695.4
94.2
12.7
21.8
305.9
231.3
 
 
59.6
0.0
171.7
 
59.7
5.4
115.4
 
43.0
7.3
 
20080
254.8
3
562.1 5.9 562.0
1215.2260.61141.0
511.8 10.4 447.3
63.0 4.1 53.4
487.5
424.5
244.3
417.9
364.5
24.3 95.9 29.4
123.4 25.0 99.9
203.6219.3 582.5
-224.6 58.7 -20.7
7.5160.6 5.0
5.1 56.4 4.6
2.1
0.9

10.5
110.1
1.7
0.9
3.2 43.2 2.8
9.5
Stock idea – Gujarat State Petronet Limited

At the current market price of Rs. 93.5 the stock is trading at 11.2 times
FY11E diluted EPS of Rs. 8.3. We value the stock at 14.0x FY11E EPS and
arrive at a target price of Rs. 116.4. We maintain our rating on the stock
as BUY.

Standalone Quarterly Results – GSPL Ltd

 
Income statement: Standalone
Q3FY10 Q2FY10 Q3FY09
117.4
200703
542.85.8
965.9
123.3
335.4
15.8
49.8
13.5
317.6
101.6
267.7
86.5
17.8
22.2
89.4
79.5
175.7
-264.7
42.9
5.0
36.6
3.5
14.8
1.6
27.6
0.8
23.5
4.0
9.5

Bajaj Capital Centre for Investment Research

Rs. Cr.
QoQ (%)

200603
542.2
907.5
268.0
69.3
263.5
194.2
4.5
46.7
244.6
-360.3
2.5
2.3
0.8
0.8
20050

-44.0
3
350.0
398.3

129.3
(170)bps

2.9 (20)bps
7.2
5.4

4.3
205.5
47.9
74.2
203.5
-
3.6
2.1
-13.1
16.0
5.5
162.0
-72.4
1.5
2.5
6.9
2.3
5.7
0.4
4.8
1.4
1.8
5.2
YoY (%) 5 yr

200403

80.1
2.9
CAGR
128.6
%
210.2 -43.7  
224.3 120.5  
143.1 -2.3
60.1
140.2
29.0
1.0
-
28.3
149.0
39.6
770bps
-1.9
1.8 133.4
13.9 191.1  
-296.8 38.9  
0.0 369.4  
2.0 303.6  
0.1
1.5
91.7
317.4
1940 bps  
1.7
0.8

4/6
 

 
 Stock idea – Gujarat State Petronet Limited

EBITDA Margin % 94.7 87.1 87.2 84.3 73.7 63.5 57.1  

APAT Margin % 41.7 25.3 23.9 28.1 17.7 7.9 1.3  
Total Asset Turnover Ratio   0.2 0.2 0.2 0.2 0.2    
Fixed Asset Turnover Ratio   0.3 0.3 0.3 0.4 0.4    
Price/Sales 6.1              
PE Multiple 15.4              
P/BV Ratio 4.3              
*EPS for 9M FY2010 is absolute and not annualized.

1. ISI Emerging Markets

2. Capitaline Plus

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 Stock idea – Gujarat State Petronet Limited

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