Multiple triggers ahead for GSPL

Merger of city gas distribution, raising of rates by regulator and more volumes to boost earnings

Gujarat State Petronet Ltd (GSPL) is likely to see better performance over the next two years.

First, its city gas distribution (CGD) business is expected to be merged with four companies of Gujarat State Petroleum Corporation (GSPC), a sister company. The merged entity will be named GSPC Distribution Networks (GDNL). The merger, likely to be completed in the June quarter, will boost GSPL's consolidated earnings per share (EPS) in 2015-16. The combined entity will be India's largest CGD company and deliver Rs 5-6 per standard cubic metre (scm) of Ebitda (Earnings before interest, taxes, depreciation, and amortisation). Analysts estimate GSPL's 26 per cent stake in the merged entity will add Rs 3.5-4.2 to its consolidated EPS in FY16.

Second, the company management expects the Petroleum and Natural Gas Regulatory Board (PNGRB) to raise rates by 8-10 per cent. Analysts believe an upward revision of 10 per cent (order expected in a couple of months) could add about 14 per cent to EPS.

Third, softening LNG (liquefied natural gas) prices and higher offtake from Essar Steel, Essar Oil and ONGC Petro additions Ltd, among others, could boost transmission volumes. Subdued demand from the industrial segment has led to weakness here, a key concern in recent quarters. While analysts expect near-term pressure to continue, volumes could then improve to about 28 million standard cubic metres a day (mscmd) over the next two years, from 23 mscmd in the December quarter.

Clearance of the price pooling mechanism for gas-based power plants could be another catalyst and boost overall volumes, revenue and profitability. "GSPL expects the consolidated CGD volume to touch 10 mscmd in 2.5-3 years, implying an incremental EPS of Rs 3.5, which adds Rs 34 per share to our target price," said analysts at Emkay Global in a recent note. They have a target price of Rs 151 on the stock.

Most analysts polled by Bloomberg from last month remain positive on GSPL. Their average target price stands at Rs 131, about 10 per cent higher from current levels. Protection to a downside comes from the fact that the stock trades at 1.6 times the FY16 estimated book value, about 19 per cent lower than its historical average one-year forward price/book ratio of two times.