Tariff decision: A new trigger for GSPL

Analysts expect FY16 earnings upgrade of 29-85%

Gujarat State Petronet Ltd (GSPL) got a big boost with a favourable referendum from Appellate Tribunal for Electricity (Aptel) in a rate revision case against the Petroleum and Natural Gas Regulatory Board (PNGRB). The revision was a trigger for the stock and it stock gained 6.5 per cent to a 52-week high of Rs 114.85 on Thursday, before closing at Rs 111.10. The order removes a key overhang and sets a different precedent for rate calculations.

There had been a boost in July, when a retrospective increase of 10.8 per cent in rates (from July 2012) was allowed for its Gujarat pipelines. GSPL is an infrastructure provider for transmission of gas in Gujarat. The benefits had boosted its September quarter performance. Its stock appreciated 31 per cent between July and early November 10, when the quarterly results were announced.

The Aptel order means GSPL could get a second rate rise within six months, boosting earnings significantly. It had contested various elements of the rate determination used by PNGRB, such as the inflation rate, system use gas, volume divisor, capex, removal of future spur lines, treatment of number of employees and depreciation rate. It felt these factors when being considered in an irrational and arbitrary manner. The appellate court has asked PNGRB to reconsider the earlier proposed rate and this will be effective July 27, 2012.

Though how much the rate would increase is not known, analysts at Edelweiss expect a five or 15 per cent retrospective increase. This will lead to GSPL's FY16 estimated earnings jumping either 29 per cent, 57 per cent or 85 per cent, respectively, from their current estimates. Consequently, their discounted cash flow-based target price of Rs 126 will increase by seven per cent or 15 per cent or 22 per cent, respectively, based on the above rate rises.

The decision will have more implications, as PNGRB is likely to take future revisions much more judiciously, say analysts. Analysts at Nomura add with Aptel emphasising that a 12 per cent post-tax return on capital is important and in the interest of all stakeholders, this will lead PNGRB to re-look at the entire rate setting exercise. The verdict will also end the uncertainty and overhang, as well as improve sentiment for gas network operators such as GAIL.

GSPL is also likely to see better transmission volumes. Analyst Sachin Mehta of Centrum expects volumes of 25/32 mscmd in FY15/16 versus 21 mscmd in FY14. This will be backed by incremental gas flow from other projects and agreements to be implemented over FY15-17.