The Hindu Business Line : Gujarat State Petronet: Buy

The company, with its growing network of pipelines criss-crossing Gujarat, is well-positioned to ride on the higher gas volumes that will hit the State in a year’s time.

The agreement with Reliance Industries to transport its KG Basin gas and the expansion of the pipeline network to high gas market potential areas such as Morbi should ensure sustained growth in transportation volumes. GSPL’s parentage (it is a subsidiary of Gujarat State Petroleum Corporation) and its entrenched position in the mature Gujarat market are added comfort factors.

Business profile

GSPL is a gas transmission company that offers its pipeline network, now confined to Gujarat, on open-access basis to transport gas for customers.

Gas producers, traders and LNG terminal operators along with consumers such as power and fertiliser companies, chemical plants and city-gas distribution companies constitute the customers for GSPL. GSPL does not market the gas and revenue comes from transportation charges only.

The company owns 1,130 km of pipelines in Gujarat connecting supply centres such as Hazira and Dahej to markets in Vapi, Morbi, Kalol, Vadodara and Rajkot. A further 400 km of pipelines are under construction now.

Last fiscal, the company transported close to 18 million standard cubic metres per day (MMSCMD) of gas..

Growth drivers

GSPL will be transporting upto 15 MMSCMD of KG Basin gas for Reliance Industries from a delivery point in Gujarat to the latter’s refinery in Jamnagar. Though the initial gas transmission agreement is only for 11 MMSCMD for a 15-year period, it is expected that transmission volumes will increase steadily as output from the KG Basin increases.

GSPL will be laying a new pipeline from Bhadabut, the delivery point designated by Reliance, to Jamnagar for this purpose.

The expansion of the network to Morbi is likely to increase volumes as ceramic tile producers there convert to cheaper natural gas. GSPL is also likely to benefit from the fast growing city gas distribution (CGD) business in cities such as Ahmedabad, Surat and Vapi. The company is picking up strategic equity stakes in GSPC Gas Company Ltd. and Sabarmati Gas Ltd., which are developing CGD businesses in Gujarat. GSPL is also a 11 per cent equity holder in Krishna Godavari Gas Network Ltd., which plans to develop a CGD network in Andhra Pradesh.

On the supply side, the output from the ageing Hazira fields owned by parent GSPC is declining but higher throughput from Shell’s LNG facility and of Petronet LNG in Dahej is likely to more than compensate. Volumes from the Panna-Mukta-Tapti joint venture are also likely to marginally increase, but the big push would come when Reliance’s KG Basin gas hits the Gujarat market late in 2008 followed by that of GSPC in a couple of years.

GSPL sits pretty in a market that is set to witness rapid growth in gas supply and demand in the next couple of years.

Interest overhang

Thanks to the frenetic pace of expansion and the consequent large borrowings, GSPL’s interest costs are shooting upwards.

It more than doubled to Rs 19.80 crore in the first quarter of this year compared to the same period last year and the trend line is pointed upwards. Similarly, depreciation charge has also been increasing as the company commissions newer pipeline capacities. Together, interest and depreciation are likely to cast a shadow on near-term earnings growth.

In the first quarter, despite a 48 per cent growth in operating profit to Rs 88.73 crore, post-tax earnings fell 7.5 per cent to Rs 17.87 crore mainly due to higher interest and depreciation charge.

However, as transportation volumes increase over the next few quarters, the impact will be muted to some extent.

The price-earnings multiple is a stiff 46 based on annualised first quarter 2007-08 earnings but given that the company is still in the investment mode, PEM comparisons could be misleading.

Earnings are bound to quickly catch up with valuations once the pipelines are commissioned and gas transportation volume increases. The GSPL stock is for investors willing to stay invested in the medium-term.

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