Compass: Multiple triggers for GSPL

Higher tariffs, improving volume outlook key positives for company

The Gujarat State Petronet (GSPL) stock has fallen five per cent in the past three months, lagging the S&P BSE Sensex’s 0.1 per cent decline in this period. Continued weakness in gas transmission volumes is a key reason behind this weakness. However, there are a host of triggers lined up for the company, which could reverse the stock price trend. 

One, the company is awaiting the final tariff orders from the Petroleum and Natural Gas Regulatory Board, if it materialises, can give up to 15 per cent fillip to GSPL’s blended tariffs in FY17. Second, there are many volume catalysts lined up over the next few months. The triggers include commissioning of Petronet LNG’s Dahej Terminal expansion and Mundra LNG project, and higher volumes from industrial consumers such as Torrent Power and Essar Group, among others. These along with rising city gas distribution volumes given the increased adoption of eco-friendly natural gas will drive healthy momentum in GSPL’s volumes going forward. “These will offset lower LNG off-take by Reliance Industries' refineries, after the commissioning of petcoke gasification project,” says Tarun Lakhotia, oil and gas analyst at Kotak Institutional Equities. Addition of new pipelines in Saurashtra and north Gujarat will also aid GSPL’s volumes. Attractive pricing of LNG versus other fuels would aid volume recovery for the company. Third, improving tariffs and volumes will drive margin expansion from here on. 

In this backdrop, most analysts are positive on GSPL and expect its earnings to grow at a compounded annual growth rate of 18-20 per cent over the next two years. Their average target price of about Rs 176 per share indicates upside potential of 18 per cent from Friday’s closing price of Rs 149 apiece. At current levels, the scrip trades at inexpensive valuations of 13.4 times FY18 estimated earnings. 

Strong prospects of GSPL’s standalone business will be complimented by the two city gas distribution companies it has stakes in. GSPL’s stake in Gujarat Gas and Sabarmati Gas now contribute about one-fifth of GSPL’s target price estimates.  

“Any viability gap funding from the government for GSPL’s cross-country pipelines could act as a potential catalyst for the stock price,” says Ritesh Gupta, analyst at Ambit Capital. 

On the flip side, under-utilisation or increased investments in cross-country pipelines is a key downside risk for the company.