The stock of Gujarat State Petronet Limited (GSP) has rallied by around 65 per cent in the last one year to ₹349.80. This was on the back of renewed demand for natural gas as the economy picked up and favourable regulatory measures for the industry, especially for the city gas distribution (CGD) network.

GSP, which is the largest natural gas transmission player next to GAIL in India, will be a beneficiary of government’s push to increase the share of gas in India’s energy mix. This, coupled with GSP’s expansion plans to cater to the rising gas demand, makes the company look well placed to deliver healthy revenue growth.

At the current market price, GSP is valued at about 11 times its estimated earnings (Bloomberg consensus) for the next one year as against the last five-year average of about 10 times. While the stock is slightly expensive relative to historical levels, it seems to be a good bet for long-term investors given the scope for growth from the structural shift happening (increase in the share of gas in energy mix). Thus, investors with high-risk appetite can consider accumulating the stock on dips.

Volume visibility

The company transported over 146.2 mmscmd (million metric standard cubic metre per day) of natural gas in FY21, lower by 3 per cent y-o-y, to customers including refineries, fertilizer plants, petrochemical plants, power plants, CGD companies and other industries.

GSP’s current pipeline network connects to major gas supply sources in Gujarat. These include collection points near the natural gas fields of Hazira, re-gassified LNG from Shell’s terminal at Hazira, Petronet LNG’s terminal at Dahej, GSPC LNG’s terminal at Mundra along with the Panna-Mukta-Tapti gas fields.

Going ahead, the re-gas capacity alone in Gujarat is expected to increase by more than 50 per cent from the current levels of 24 mmtpa (million metric tonne per annum) due to new LNG terminals, adding more to business prospects.

The government’s thrust to increase the share of natural gas (NG) in the energy basket from around six per cent now to 15 per cent by 2030, will be another driver for sustainable business to GSP.

The company has received necessary approvals from the Petroleum and Natural Gas Regulatory Board (PNGRB) for developing additional connectivity with Petronet’s Dahej terminal, to ensure requisite infrastructure for offtake of higher volumes from the terminal.

Further, discussions with PNGRB for achieving connectivity with other upcoming terminals in Gujarat, are also underway.

In addition to current gas transmission network of about 2,700 km, additional 3000 km is expected to be developed in Gujarat with an outreach to all the 25 districts of Gujarat in the long-run. The company plans to expand its pipeline network outside the state of Gujarat by way of participating in Natural Gas Pipeline bidding carried out by PNGRB.

GSP will also be a huge beneficiary of city gas distribution network in India, for which various steps are being taken by the government.

The company’s shareholding in the CGD players - Gujarat Gas (54.17 per cent holding) and Sabarmati Gas (27.47 per cent) will give a leg-up to the earnings of the GSP going ahead.

GSP network’s share of sales to CGD players has already increased to 40 per cent in Q4 FY21 from 25 per cent and 30 per cent in FY19 and FY20 respectively.

Further, the new draft rules brought in by the petrol and natural gas ministry to limit sale of natural gas only by licensed entities, if becomes law, will reduce the risk of competition for CGD players such as Gujarat Gas, which results in GSP becoming a indirect beneficiary.

Decent financials

Until FY20, GSP has reported strong revenue growth with three-year CAGR of 27.8 per cent to about ₹12,200 crore. During the same period, the net profit went up by a CAGR of 45 per cent to ₹1,730 crore. This is on the back of incremental tariffs announced by PNGRB for the transportation of natural gas and the reduction in costs.

Gas transmission tariffs are regulated and determined by PNGRB based on utilisation, capital and operating expenditure and working capital requirements. The regulator, in September 2018, revised the gas transmission tariff for GSP’s High Pressure Gas Pipeline by 28 per cent to ₹34/mmBtu and for low-pressure gas pipeline to ₹4.08/mmBtu from ₹1.88/mmBtu.

Performance in FY21 has been modest due to the impact of Covid-19. Consolidated revenue declined by 5 per cent while net profit declined by 7 per cent. Gas was markedly less impacted than oil or coal demand in FY21. However, the first quarter of FY22 showed a decent pick-up in financial metrics driven by growth in transamision volume.

In terms of debt, the company is well placed with debt to equity at less than 0.5 times, leaving scope for leverage required for capital expansion of the company.

Robust volume outlook, high margins, low debt and steady cash flows bring positive outlook for GSP.

Key risks include spike in gas prices that will lower the demand for natural gas, consequentially impacting the transamission volume. Also, lower than expected capacity enhancement in the gas infrastructure in the country and fixation of lower tariffs for transmission going ahead, may aso dent the volumes.

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