Buy Gujarat State Petronet, target Rs 235: Emkay Global

Emkay Global Financial Services has given a buy recommendation on Gujarat State Petronet with a target price of Rs 235.

Shares of Gujarat State Petronet traded at Rs 204.1 around 12 pm on 15 July, 2019. The brokerage has set a one-year horizon for the stock to hit the target price.

Investment rationale by the brokerage-

Volume outlook strong with Morbi, power demand and new LNG terminals
"Our channel checks suggest GSPL’s volumes are up to almost 40mmscmd with 3-4/1-2mmscmd from Morbi/power seasonality. Morbi may rise from the current 5.5-6.5 to more than 8mmscmd in six months, if tile makers are able to secure sizeable orders from the US where Chinese players are affected by trade curbs," said the brokerage.

Talks of a revival of stranded gas-based power plants are positive as Gujarat has 14 units with a 7.7GW capacity that consumed about 7.5mmscmd of gas in FY19 at 19 per cent plant load factor (PLF). However, increasing PLF to 35 per cent/50 per cent implies 6.5/12.5mmscmd of more demand.

With spot LNG at $4/mmbtu and new LNG capacities such as 2.5mmtpa Dahej expansion (started in June 2019), 5mmtpa Mundra (expected soon) and 5mmtpa Jafrabad FSRU (by mid-CY20), R-LNG volumes should grow across GSPL’s Gujarat grid.

Tariff downsides to be protected by capex program and holiday
"We believe that the tariff concerns are overstated as being a capitalization model, future reviews should depend on the upcoming capex program," said the brokerage.

GSPL plans to incur Rs 4,000 crore capex to double its capacity to 70mmscmd and also expects source-based holiday to be extended beyond two years from now.

Further, in the last year’s tariff order, heads such as Rs 900 crore of compressor/spur-line capex are not included.

"We have still taken a 20 per cent blended tariff cut in FY22E in our DCF while not assuming the new capex program. FY19 saw opex jump 82 per cent due to SUG and RIL charges. We expect it to moderate," the brokerage said.

Valuation and outlook
The brokerage has raised its FY20/21E volumes and Ebitda estimates by 13 per cent/6 per cent each and PAT by 17 per cent/8 per cent and increased long-term volumes in DCF by 2mmscmd for each year, thereby raising SOTP-based target price by 5 per cent to Rs 235, with Gujarat Gas stake valued at a 30 per cent discount to FV.

The stock currently trades at 6.5 times FY21E core EPS on 12 per cent ROE. As per the brokerage, key risks are volume decline from adverse gas economics, cost overruns and regulatory overhangs.