buy - hdfc securities state petronet...the construction of a 380km long greenfield mumbai-vadodara...

INITIATING COVERAGE 14 MAR 2019

Gujarat State Petronet BUY

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters

Riding the tideIn the wake of the Modi era, starting May-14 up to Dec-17, Gujarat State Petronet’s (GSPL) stock soared 237% to Rs 226 driven by a positive surprise in transmission volume (+11.5% CAGR). This led to EBITDA expanding at 11.1% CAGR and APAT at 22.4%. However, the stock has corrected ~20% since Dec-17 as investors (1) Perceived the additional 28.4% stake purchase in Gujarat Gas (GGL) as a costly buy, and (2) Anticipated a lower tariff for FY19-23 to be fixed by Petroleum and Natural Gas Regulatory Board (PNGRB) owing to GSPL’s higher than expected volumes in the preceding period. GSPL’s earnings follow a regulatory cycle as PNGRB fixes tariff only once in five years. The 54.16% stake in GGL is not only an investment in a self propelling, quasi- monopolistic and growing City Gas Distribution (CGD) business but it also helps to smoothen out cyclicality. Contrary to market fears of a low tariff, PNGRB has approved a hike of 27.4% to Rs 1,440/tscm in Sep-18 taking cognizance of the expected 3mmscmd loss in volume (~8.6% of current vols) post the commissioning of RIL’s petcoke gasification plant in 1HFY20, among other factors. The company is likely to remain in a sweet spot with its cumulative FCF of Rs 38.2bn over FY19-23E that will reduce its net debt position to Rs 4.4bn in FY23E from Rs 26.9bn in FY18.

We expect incremental volume of 4.76mmscmd by FY23E despite the dip in RIL’s volume owing to (1) The sole right to transmit regasified gas from the LNG terminal at Mundra (capacity 18mmscmd), (2)

Impending expansion of Petronet LNG’s (PLNG) Dahej terminal by 9mmscmd, and (3) Its principal presence in a state with 13.3% growth in Gross State Domestic Production (GSDP) in FY19E and one whose manufacturing sector alone contributes 45% to GSDP.

The board had assumed 29.12mmscmd of volume for FY19 and 26mmscmd from FY20 onwards. The 9MFY19 average was 35.30mmscmd and the actual volumes will continue to exceed the projected volumes. Thus, in the next tariff revision for the period FY24 onwards, the board is likely to revise the tariff downwards by 26% to Rs 1,060/tscm.

We value GSPL’s transmission business using Discounted Cash Flow (DCF) at Rs 120/sh. To this, we add Rs 87/sh as value of its investments in GGL, Sabarmati Gas (30% discount to EV/EBTDA valuation) and other investments (at book value) to arrive at the target price of Rs 207/sh. We initiate with BUY.

Financial Summary (Standalone) Rs bn FY17 FY18 FY19E FY20E FY21E Revenues 10.28 13.32 18.93 17.58 18.31 Growth (%) 3.6 29.6 42.1 (7.1) 4.2 EBIDTA 8.88 11.49 15.99 14.53 15.14 EBITDA Growth (%) 2.6 29.3 39.2 (9.2) 4.2 EBIDTA Margin (%) 86.4 86.3 84.5 82.6 82.6 APAT 4.97 6.70 8.32 7.45 7.96 EPS (Rs) 8.8 11.9 14.8 13.3 14.2 P/E (x) 20.4 15.1 12.2 13.6 12.7 EV/EBITDA 11.2 11.1 7.8 8.3 7.6 Source: Company, HDFC sec Inst Research

INDUSTRY OIL & GAS

CMP (as on 14 Mar 2019) Rs 180

Target Price Rs 207 Nifty 11,343

Sensex 37,755

KEY STOCK DATA

Bloomberg GUJS IN

No. of Shares (mn) 564

MCap (Rs bn) / ($ mn) 102/1,467

6m avg traded value (Rs mn) 90

STOCK PERFORMANCE (%)

52 Week high / low Rs 207/149

3M 6M 12M

Absolute (%) 2.0 (1.9) (6.1)

Relative (%) (3.0) (1.0) (17.7)

SHAREHOLDING PATTERN (%)

Promoters 37.65

FIs & Local MFs 20.40

FPIs 17.05

Public & Others 24.90 Source : BSE Nilesh Ghuge [email protected] +91-22-6171-7342 Divya Singhal [email protected] +91-22-6639-3038

GSPL: INITIATING COVERAGE

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Volume boost expected from the upcoming LNG terminals The volume outlook of GSPL shall remain robust owing

to (1) The sole right to transmit regasified gas from Gujarat State Petroleum Corporation (GSPC) -Adani’s 5mmtpa LNG (equivalent to ~18mmscmd of natural gas at 100% utilisation) terminal at Mundra, (2) The near completion of Petronet LNG’s Dahej terminal expansion to 17.5mmtpa from 15mmtpa.

While the Mundra LNG terminal commissioning is in- progress, the terminal is already connected to GSPL’s gas grid through Mundra-Anjar pipeline. We expect a gradual ramp-up in the Mundra LNG terminal from 10% utilization in FY20 but not beyond 35% in FY22 because of (1)Absence of long-term tie-ups with offtakers, and (2) Higher regassification tariff over its competitior. However, we expect that 80% of the total volume from this terminal will be sold in Gujarat itself.

Total Volume To Grow At 3.4%CAGR Over FY18-23E

Source: Company, HDFC sec Inst Research

Besides, gas volumes shall increase post the completion of the 2.5mmtpa expansion of PLNG’s

Dahej terminal by 2QFY20. The new facility is to ramp-up gradually from 16% in 2HFY20 to 90% by FY22.

We thus, expect net incremental volume of 4.76mmscmd for GSPL’s network owing to the increased demand by the end of FY23, despite being partially offset by ~3mmscmd in RIL volumes post the start of its own petcoke gassifier in 1HFY20.

There is further volume upside potential post the commencement of the Chhara and Jafrabad terminals, expected commisioning in FY22. However, we have not factored-in these terminals in our assumptions owing to lack of clarity on these projects. We expect the invesment in these project to be a function of domestic gas production from ONGC and RIL and the competition from Mundra and Dahej terminals.

Upcoming LNG Terminals In Gujarat LNG terminal Entity Capacity

(mmtpa) Expected

commissioning Dahej Petronet LNG 2.5 1HFY20 Mundra GSPC-Adani 5.0 1HFY20 Jafrabad Swan Energy 5.0 FY22 Chhara HPCL Shapoorji Energy Ltd 5.0 FY22 Total 17.5 Source: Company, HDFC sec Inst Research Expected Incremental Volume Of 4.76mmscmd From Mundra And PLNG Alone From Q1FY20E To Q4FY23E


We expect incremental volume of 4.76mmscmd owing to the incremental demand by the end of FY23, after adjusting ~3mmscmd in RIL volumes lost post the start of petcoke gassifier in 1HFY20 By 1HFY20, LNG regasification capacity in Gujarat will increase by 7.5mmtpa (27mmscmd)

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Gujarat has high potential for CNG After the recently concluded Ninth round of CGD

bidding, 100% geographical area and population of Gujarat is covered under the CGD network. Over the next three to five years, bid owners will expand their infrastructure to the newly won GAs. This will help in tapping CNG market demand through long distance highways and intrastate connectivity.

Gujarat has the least vehicles to dispenser ratio (~613) among the major CNG consuming states/regions. Maharashtra comes to a close second with 622 vehicles per dispenser. However, in Maharashtra the CNG vehicle population is highly concentrated (~75%) in Mumbai and Thane alone. Unlike Maharashtra, the CNG vehicle population is widely spread in Gujarat, thus, the time spent for refueling at the CNG outlet, which is one of the most important parameters, is the lower in Gujarat as compared to Delhi and Mumbai.

Further, as per the commitment made by winners of the Ninth CGD round, minimum 140 CNG stations i.e. >28% of the current CNG stations in Gujarat will be added over the next 8 years. These can easily cater to ~0.26mn (~29% of the current vehicular population) more vehicles without distorting the current vehicles to dispenser ratio.

Number Of Vehicles Per Dispenser Is The Lowest In Gujarat

Source: PNGRB, HDFC sec Inst Research Gujarat Has Shown Second Highest CNG Growth Rate Over FY15-18

Source: PNGRB, HDFC sec Inst Research

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Having covered 100% geographical area in Gujarat under CGD, expansion through long distance highways and intrastate connectivity will help in tapping CNG market demand More than 140 (28% of the current CNG stations in Gujarat) will be added over the next 8 years, which will help maintain the vehicle to dispenser ratio such that the time spent for refueling will remain lower than that in other states


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66% of the Mumbai - Vadodara expressway runs along GAs owned by Gujarat Gas The construction of a 380km long greenfield Mumbai-

Vadodara expressway is underway under the National Highway Development Project (NHDP). All contracts have already been awarded and it is expected to be completed by FY22 in a phased manner. Out of these 380km, 251km lie in the GA wherein Gujarat Gas, GSPL’s subsidiary, operates.

Moreover, this expressway connects not only the industrial belt of Ankleshwar-Surat-Vapi-Thane but also major cities like Thane, Surat, Vadodara and Ahmedabad. Thus, there is strong potential for CNG demand along the way. GSPL, the sole supplier of gas to Gujarat Gas, is sure to be a huge beneficiary of this development.

All Tenders Have Been Awarded As On Date And Expected Completion Is At The End Of FY22 No. From To District Stretch (kms)

1 Vadodara Padra Vadodara 24 2 Padra Sanpa Panch Mahal 32 3 Sanpa Manubar Bharuch 31 4 Manubar Ankleshwar Bharuch 13 5 Ankleshwar Kim Surat 25 6 Kim Ena Surat 37 7 Ena Gandeva Navsari 28 8 Gandeva Jujuwa Valsad 35 9 Jujuwa Karvad Valsad 27

10 Karvad Talasari Palghar 25 Source: Company, HDFC sec Inst Research

251kms of Mumbai-Vadodara stretch pass through GAs which are owned by Gujarat Gas.


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Gas Transmission Tariff PNGRB determine natural gas transmission tariff for

GSPL’s pipelines under the provisions of the PNGRB (Determination of Natural Gas Pipeline Tariff) Regulations, 2008.

The tariff is determined using the Discounted Cash Flow (DCF) method by assuming the following over the economic life of the pipeline, viz. (1) Projected volume, (2) Actual and projected pipeline capital expenditure, (3) Actual and projected operating expenditure, (4) Working Capital requirements.

Each time PNGRB reviews the tariff for the upcoming cycle, the deviation between actual and expected earnings is considered to arrive at the new transmission tariff by adjusting the assumptions. This review happens only once in five years which essentially forces GSPL’s earnings to oscillate around the mean, the mean as expected by PNGRB, with a wavelength of five years. This explains the cyclical nature of GSPL’s transmission business.

In 1HFY19, PNGRB had revised the final tariff for High Pressure Gas Pipeline from Rs 26.58/mmbtu (Rs 1,002/tscm) to Rs 34/mmbtu (Rs 1,282/tscm). The revised tariff was also up for Low Pressure Gas Pipeline from Rs 1.88/mmbtu (Rs 71/tscm) to Rs 4.08/mmbtu (Rs 153/tscm).

The volume assumption was taken to be 29.12 mmscmd for FY19 (while the actual 9MFY19 average was 35.3mmscmd) and 26mmscmd for FY20 onwards. We expect the board to revise it down by ~26% to Rs 1,060/tscm in the next tariff revision in FY24, owing to higher actual volumes than expected.

Tariff Demonstrates Sharp Movements Every 5 Years

Source: Company, HDFC sec Inst Research Returns Spiked In FY19 Post The Revision In Tariff


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Blended tariff (Rs/'000 scm) YoY growth (%)- RHS PNGRB has increased the final blended tariff of GSPL by ~27% in 1HFY19 from Rs 1,130/t scm to Rs 1,440/t scm… …We expect the board to revise the tariff downwards by 26% to Rs 1,060/tscm as actual volumes will be more than the projected volumes 23

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Cumulative FCF of ~Rs 38bn expected over FY19-23E In FY18, GSPL had bought 39.1mn shares of Gujarat

Gas Ltd (GGL) from Gujarat State Petroleum Corporation (GSPC) in two tranches for total consideration of Rs 32.6bn. For the said purpose, it had raised debt of ~Rs 25bn that turned the net cash position of Rs 1.7bn in FY17 to a net debt one of Rs 26.9bn in FY18. We expect this to reduce to Rs 4.4bn by FY23 (despite divident payment of Rs 10.5bn) as GSPL is expected to generate Free Cash Flow (FCF) of Rs 38.2bn over FY19E-23E.

FCFF Likely To Stay Between Rs 7-8bn Over FY19-23E


Gross Debt Peaked In FY18 Post The GGL Acquisition


FCF To Boost Dividend Payout To 26% Over FY20-23E


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Gross debt in FY17 was Rs 6bn which rose by Rs 24bn in FY18 post the GGL acquisition (highlighted in red). We expect GSPL to repay ~Rs 3bn pa starting FY20E and reach ~Rs 19bn of Gross Debt by the end of FY23E

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Net Cash Position To Improve By ~Rs 23bn Over FY18-23E


Investments in CGD to pay-off strongly GSPL has a 27.4% stake in Sabarmati Gas Limited (SGL),

which is engaged in the business of development of City Gas Distribution (CGD) networks in Gandhinagar, Sabarkantha and Mehsana districts of Gujarat. Its sales volumes for FY18 was 0.83 mmscmd. SGL has also been granted authorization by Petroleum and Natural Gas Regulatory Board (PNGRB) for undertaking CGD business activity in Patan district of Gujarat.

Besides, GSPL holds 54.16% stake in GGL, which is currently operating in 18 GAs and won another 7 GAs in the recently concluded CGD auction rounds (Ninth and Tenth together). GGL has a strong franchise business model with presence in 22 districts of Gujarat. It’s currently selling >6.5mmscmd of gas, which is expected to ramp up to 10.3mmscmd over FY19E-23E (CAGR of 10.8%), primarily driven by strong CNG and industrial demand.

Thus, we believe that the investment in CGD companies with a combined sale of >7.3mmscmd will enable GSPL to cash-in on the strong growth in this business. These companies are not only self sufficient but also no cash outflow from GSPL is required to support these entities.

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GSPL should head back to its net cash position backed by healthy free cash flows of ~Rs 38bn generated over FY19-23E


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About GSPL Gujarat State Petronet Limited (GSPL) has two segments: gas transportation and windmills.

Transportation business: GSPL’s ~2,518km long pipeline grid (refer map below) makes it India’s second largest natural gas infrastructure and transmission company. Flowing from Hazira/Dahej/Vapi, it connects natural gas supply sources to diverse industrial customers in Gujarat on an open access basis. It transports 35mmscmd of natural gas to ~133 customers that range from refineries, CGD companies, and chemical plants to industries such as power, fertilizer and steel.

In 2011, PNGRB awarded three cross-country pipelines to GSPL for which it entered into consortiums with Oil Marketing Companies (OMCs) to form GSPL India Gasnet Limited (GIGL) and GSPL India Transco Limited (GITL) to expand its pipeline infrastructure in other states of India, namely Andhra Pradesh, Punjab and Rajasthan among others.

Windmill business: This division, which accounted for 2.4% of total revenues of GSPL in 9MFY19, is engaged in generation of electricity through its 52.5 megawatt Wind Power Project at Maliya Miyana (district: Rajkot), Gorsar and Adodar (district: Porbandar). In FY18, it sold 105.99mnKWH of electricity. The segment operated at an EBIT margin of 58.6% for 9MFY19 (+653bps YoY) and returned 21.8% (+549bps YoY) on capital employed over the same period.

GSPL’s CGD entry: The Company has been authorised to develop the City Gas Distribution (CGD) network in the Punjab GA, specifically in Amritsar and Bhatinda. It has already started necessary activities in this regard and gas supply is expected to commence in FY20.

Subsidiary Companies Gujarat Gas Limited (GGL)

It is India's largest city gas distribution player with presence spread across 23 Districts in the State of Gujarat including Rajpipla, the newly awarded city in Narmada district under the Ninth round of bidding.

Moreover, it has won another 6 GAs in the Tenth bidding round in (1) Punjab (Faridkot, Hoshiarpur district), (2) Haryana (Sirsa), (3) Rajasthan (Sirohi, Dungarpur), and (4) MP (Ujjain, Indore, Ratlam).

GGL’s customer base comprises 1.25mn customers in the residential, >13,440 in the commercial and 3,300 in the industrial segments. The company currently operates 291 CNG stations.

Its sales volumes increased to 6.55mmscmd in 9MFY19 (+8.3% YoY). Reported Revenue/ EBITDA/ PAT were Rs 58.47/7.69/3.09bn in 9MFY19, up 31.7/14.4/37.0% YoY. The adjusted EPS for the same period stood at Rs 4.50 (+37.0% YoY). In FY18, GSPL received Rs 298mn in dividend from GGL.

GSPL India Gasnet Limited (GIGL) It is a Special Purpose Vehicle (SPV) promoted by GSPL

(52% stake) along with IOCL (26%), BPCL (11%) and HPCL (11%) for the purpose of implementation of cross country pipeline spanning over 1600 km passing through Mehsana - Bhatinda - Jammu – Srinagar and the Bhatinda - Jammu – Srinagar pipeline which will stretch over 740km. GSPL’s investment in GIGL stood at Rs 2,012.50mn as on Mar-18.

GSPL India Transco Limited (GITL) GITL is a SPV incorporated on October 2011, which is a

consortium of GSPL holding 52% equity, IOCL 26%, BPCL 11% & HPCL 11%. GSPL’s equity investment in GITL stood at Rs 1,981.20mn as on Mar-18. It shall lay a

GSPL operates ~2,518km long natural gas pipeline grid in Gujarat which connects supply sources like Hazira/Dahej/Vapi to diverse industrial customers and currently transports 35mmscmd gas GSPL is also engaged in generation of electricity through its 52.5 megawatt Wind Power Project at Maliya Miyana, Gorsar and Adodar GSPL holds 54.16% stake in GGL, which is currently operating in 18 GAs and won another 7 GAs in the recently concluded Ninth and Tenth CGD auction rounds


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network of gas pipeline and associated facilities for the transportation of natural gas to fulfill the requirement of various consumers in the states of AP, Maharashtra, MP and Rajasthan.

The Mallavaram - Bhopal – Bhilwara – Vijaipur (MBBVPL) pipeline shall originate from Mallavaram in AP with a total length of ~1700Km. It will transport Natural Gas from Krishna Godawari basin in AP, east Coast of India and also from Chittorgarh to Vijaipur traversing through four states and will cater to all the demand centres en-route of Andhra Pradesh (6 districts), Maharashtra (4 districts), Madhya Pradesh (14 districts) and Rajasthan (1 district). The estimated project cost is ~Rs 573.5mn.

Associate company Sabarmati Gas Incorporated in June 2006, Sabarmati Gas Limited

(SGL) is a joint venture between Bharat Petroleum Corporation Limited (49.94%) and Gujarat State

Petroleum Corporation (27.47%). It is engaged in the business of development of City Gas Distribution networks for supply of CNG to the household, automobiles, industrial and commercial sectors in Gandhinagar, Sabarkantha, Mehsana, Aravali and Patan Districts of Gujarat.

SGL has a network of 384 Kms of steel pipeline and 3,830km of Medium Density Polyethylene (MDPE) pipeline and customer base of 0.13mn domestic customers, 281 industrial customers and 558 commercial customers. The company operates 70 CNG stations and contributed ~2.34% of total transmission revenues of GSPL in FY18.

Its sales volumes increased to 0.825mmscmd in FY18 (+15.9% YoY). Reported Revenue/ PAT were Rs 8,398.70/745.40mn in FY18, up 22.2/75.1% YoY. The EPS for the year stood at Rs 37.29 (+75.3% YoY) of which it paid a dividend of Rs 2.50/sh (payout 6.7%). GSPL’s share of dividend was Rs 13.73mn.

GSPL has a 27.4% stake in Sabarmati Gas Limited (SGL), which is engaged in the business of development of City Gas Distribution (CGD) networks in Gandhinagar, Sabarkantha and Mehsana districts of Gujarat


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GSPL’s Pipeline Network Grid Spans ~2,518km in Gujarat

Source: Company


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DCF Valuation Of Transmission Business Particulars Unit FY19E FY20E FY21E FY22E FY23E FY24E FY25E FY26E FY27E Volumes mmscmd 35 33 35 36 37 38.0 38.8 39.6 40.4 Blended tariff Rs/scm 1,449 1,436 1,436 1,436 1,436 1,059 1,059 1,059 1,059 Blended tariff Rs/mmbtu 38.43 38.08 38.08 38.08 38.08 28.09 28.09 28.09 28.09 Total revenue Rs mn 18,578 17,292 18,095 19,018 19,539 14,701 14,995 15,294 15,600 Opex as a % of revenue % 15.5 17.4 17.4 17.3 17.5 17.5 17.5 17.5 17.5 EBITDA Rs mn 15,696 14,287 14,954 15,736 16,113 12,123 12,365 12,612 12,865 Rate of depreciation % 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 Depreciation Rs mn 1,840 1,990 2,140 2,290 2,440 2,610 2,793 2,989 3,198 EBIT Rs mn 13,856 12,297 12,814 13,446 13,673 9,512 9,572 9,624 9,667 Interest Rs mn 2,290 2,178 1,953 1,728 1,504 1,474 1,444 1,415 1,387 PBT Rs mn 11,566 10,120 10,861 11,718 12,170 8,039 8,128 8,209 8,280 Tax Rs mn 3,932 3,441 3,693 3,984 4,138 2,733 2,763 2,791 2,815 PAT Rs mn 7,633 6,679 7,168 7,734 8,032 5,306 5,364 5,418 5,465 Working capital change Rs mn (988.73) 278.47 (118.45) (154.08) (90.25) (67.90) (69.26) (70.65) (72.06) OCF (a) Rs mn 10,775 11,125 11,142 11,598 11,885 9,322 9,532 9,751 9,977 Capex (b) Rs mn 3,500 3,500 3,500 3,500 3,500 3,675 3,859 4,052 4,254 Free cash flow (a)-(b) Rs mn 7,275 7,625 7,642 8,098 8,385 5,647 5,674 5,699 5,723 Risk free return % 7.4 Market risk premium % 4.0 Beta of the stock 0.9 Cost of Equity % 11.0 Cost of Debt % 7.5 Weight of equity % 73.5 Weight of debt % 26.5 WACC % 10.0 NPV Rs mn 33,431 Terminal growth rate % 0 NPV of terminal growth Rs mn 57,005 EV Rs mn 90,436 Net debt Rs mn 23,145 Market cap Rs mn 67,291 Value of transmission business Rs/sh 120


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Sensitivity Of Transmission Business To Terminal Growth Rate And WACC Terminal Growth Rate (%) 120 -2.0 0.0 2.0

WACC (%) 8.0 124 150 192

10.0 103 120 146 12.0 88 100 117

Source: Company, HDFC Sec Inst Research EV/EBITDA Valuation Of Gujarat Gas (Mar-21E) Unit FY21E EBITDA (Rs mn) 11,679 EV/EBITDA (x) 10 EV (Rs mn) 116,795 Less - Net Debt (Rs mn) 11,581 Equity Value (Rs mn) 105,214 GSPL's share in Gujarat Gas % 54.16 Value of GSPL’s stake in Gujarat Gas Rs/share 71 Source: Company, HDFC Sec Inst Research SOTP Valuation (Based On Mar-21E) Business Unit Value Valuation basis Value of GSPL standalone business (A) Rs/share 120 DCF valuation based method Value of stake in Gujarat Gas (B) Rs/share 71 30% discount to EV/EBITDA valuation Value of Sabarmati Gas (C) Rs/share 8 30% discount to EV/EBITDA valuation Other investments (D) Rs/share 8 At book value Target price (Rs/share) (A)+(B)+(C)+(D) 207 Source: Company, HDFC Sec Inst Research Implied EV/EBITDA Calculation

Unit FY21 Market cap (Rs mn) 67,291 Net debt (Rs mn) 23,145 EV (Rs mn) 90,436 EBITDA (Rs mn) 15,135 Implied EV/EBITDA multiple (x) 6 Source: Bloomberg, HDFC Sec Inst Research


Page | 13

Assumptions Particulars FY17 FY18 FY19E FY20E FY21E Transmission volume In mmscm 9,071 11,506 12,821 12,046 12,605 In mmscmd 24.8 31.5 35.1 33.0 34.5 Blended tariff In Rs/t scm 1,110.87 1,129.85 1,448.63 1,435.56 1,435.56 In Rs/mmbtu 29.47 29.97 38.43 38.08 38.08 Source: Company, HDFC sec Inst Research

Implied EV/EBITDA for GSPL’s transmission business is 6x FY21. In our opinion, this is not a big ask for a business generating steady cash flows and returning more than 18% on invested capital.

Peer Set Comparison

MCap (Rs bn)

CMP (Rs) RECO TP

(Rs) Upside

(%) EPS (Rs/sh) P/E (x) P/BV (x) ROE (%)

FY18 FY19E FY20E FY21E FY18 FY19E FY20E FY21E FY18 FY19E FY20E FY21E FY18 FY19E FY20E FY21E Reliance Industries 8,495 1,341 BUY 1,331 (1) 53.1 58.9 69.9 71.9 25.3 22.8 19.2 18.6 2.7 2.5 2.2 2.0 11.1 11.3 12.1 11.3 ONGC 1,912 152 BUY 185 21 15.9 18.7 21.1 21.4 9.6 8.1 7.2 7.1 1.0 1.0 0.9 0.8 10.5 11.9 12.8 12.3 Indian Oil Corp 1,387 151 BUY 155 3 22.8 16.9 19.5 22.3 6.6 8.9 7.7 6.8 1.3 1.2 1.1 1.0 19.9 14.0 15.2 15.8 GAIL 798 354 BUY 406 15 20.4 29.2 29.5 32.0 17.4 12.1 12.0 11.1 2.0 1.8 1.6 1.5 11.7 15.5 14.2 14.1 BPCL 767 390 NEU 338 (13) 41.2 30.5 34.6 36.5 9.5 12.8 11.3 10.7 2.2 2.0 1.8 1.6 25.4 16.6 16.9 16.0 HPCL 407 267 BUY 254 (5) 41.7 25.8 29.6 32.1 6.4 10.3 9.0 8.3 1.7 1.5 1.4 1.2 28.7 15.6 16.1 15.8 Petronet LNG 357 238 BUY 324 36 13.9 13.6 16.2 20.0 17.2 17.5 14.7 11.9 3.7 3.5 3.2 2.8 23.3 20.4 22.4 24.9 Indraprastha Gas 204 291 BUY 381 31 9.6 10.5 12.5 14.5 30.4 27.6 23.4 20.0 5.8 5.1 4.5 3.9 20.9 19.7 20.4 20.8 Oil India 194 179 BUY 227 27 24.6 32.7 30.6 31.5 7.3 5.5 5.9 5.7 0.7 0.6 0.6 0.5 9.4 12.2 10.4 9.6 GSPL 102 180 BUY 207 15 11.9 14.8 13.3 14.2 15.1 12.2 13.6 12.7 2.0 1.8 1.6 1.5 14.0 15.5 12.5 12.2 Mahanagar Gas 92 928 BUY 1,126 21 48.4 57.3 57.3 59.9 19.2 16.2 16.2 15.5 4.4 3.8 3.3 2.9 24.3 25.1 21.8 20.1 Asian Oil Field Services* 3 71 NA 164 131 5.4 8.3 12.3 16.4 13.1 8.6 5.8 4.3 2.2 1.8 1.4 1.1 23.7 20.1 23.9 25.0

Source: Company, HDFC sec Inst Research, *Fair Price


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Standalone Income Statement (Rs bn) FY17 FY18 FY19E FY20E FY21E Revenues 10.28 13.32 18.93 17.58 18.31 Growth % 3.6 29.6 42.1 (7.1) 4.2 Raw Material Cost Employee Cost 0.39 0.43 0.61 0.66 0.71 Other Expenses 1.00 1.40 2.32 2.39 2.46 EBITDA 8.88 11.49 15.99 14.53 15.14 EBIDTA Margin (%) 86.4 86.3 84.5 82.6 82.6 EBITDA Growth % 2.6 29.3 39.2 (9.2) 4.2 Depreciation 1.79 1.75 1.84 1.99 2.14 EBIT 7.09 9.74 14.15 12.54 13.00 Other Income (Including EO Items) 0.88 0.73 0.71 0.90 0.99

Interest 0.60 0.35 2.29 2.18 1.95 PBT 7.38 10.12 12.58 11.26 12.04 Tax 2.41 3.42 4.26 3.81 4.07 RPAT 4.97 6.70 8.32 7.45 7.96 EO (Loss) / Profit (Net Of Tax) - - - - - APAT 4.97 6.70 8.32 7.45 7.96 APAT Growth (%) 11.5 34.8 24.3 (10.5) 6.9 AEPS 8.8 11.9 14.8 13.3 14.2 AEPS Growth % 11.5 34.8 24.3 (10.5) 6.9


Standalone Balance Sheet (Rs bn) FY17 FY18 FY19E FY20E FY21E SOURCES OF FUNDS Share Capital 5.64 5.64 5.64 5.64 5.64 Reserves And Surplus 39.32 45.01 51.33 56.81 62.67 Total Equity 44.96 50.65 56.97 62.45 68.30 Long-term Debt 6.31 30.58 30.58 27.58 24.58 Short-term Debt - - - - - Total Debt 6.31 30.58 30.58 27.58 24.58 Deferred Tax Liability 4.72 4.98 5.08 5.19 5.29 Long-term Provision 0.41 0.43 0.49 0.51 0.53 TOTAL SOURCES OF FUNDS 56.39 86.64 93.12 95.72 98.70 APPLICATION OF FUNDS Net Block 31.66 31.14 32.32 33.35 34.22 Capital WIP 6.86 8.96 9.48 10.01 10.53 LT Loans And Advances 1.39 1.26 1.79 1.91 2.05 Total Non-current Investments 7.65 41.81 41.81 41.81 41.81 Inventories 1.12 1.23 1.38 1.29 1.35 Debtors 1.22 1.24 1.76 1.63 1.70 Cash and Cash Equivalent 8.03 3.65 7.43 8.76 10.22 Other Current Assets 0.41 0.19 0.27 0.25 0.26 Total Current Assets 10.77 6.31 10.84 11.94 13.53 Creditors 0.14 0.19 0.31 0.32 0.33 Other Current Liabilities & Provns 1.80 2.66 2.82 2.98 3.13 Total Current Liabilities 1.94 2.85 3.13 3.29 3.46 Net Current Assets 8.83 3.46 7.71 8.64 10.07 TOTAL APPLICATION OF FUNDS 56.39 86.64 93.12 95.72 98.70



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Standalone Cash Flow Statement (Rs bn) FY17 FY18 FY19E FY20E FY21E Reported PBT 7.38 10.12 12.58 11.26 12.04 Non-operating & EO Items (0.88) (0.73) (0.71) (0.90) (0.99) Interest Expenses 0.60 0.35 2.29 2.18 1.95 Depreciation 1.79 1.75 1.84 1.99 2.14 Working Capital Change 2.56 1.11 (0.99) 0.28 (0.12) Tax Paid (2.41) (3.42) (4.26) (3.81) (4.07) OPERATING CASH FLOW ( a ) 9.03 9.17 10.75 10.99 10.94 Capex (1.40) (3.33) (3.54) (3.54) (3.54) Free Cash Flow to firm (FCF) 7.63 5.84 7.21 7.45 7.40 Investments (0.54) (34.16) - - - Non-operating Income 0.88 0.73 0.71 0.90 0.99 Others 0.30 0.89 0.16 0.12 0.13 INVESTING CASH FLOW ( b ) (0.76) (35.86) (2.67) (2.52) (2.42) Debt Issuance/(Repaid) (4.36) 24.27 - (3.00) (3.00) Interest Expenses (0.60) (0.35) (2.29) (2.18) (1.95) FCFE 2.67 29.76 4.92 2.27 2.45 Share Capital Issuance - - - - - Dividend (1.02) (1.61) (2.00) (1.97) (2.11) FINANCING CASH FLOW ( c ) (5.98) 22.31 (4.29) (7.15) (7.06) NET CASH FLOW (a+b+c) 2.30 (4.38) 3.79 1.33 1.46 EO Items, Others Closing Cash & Equivalents 8.03 3.65 7.43 8.76 10.22


Standalone Key Ratios

FY17 FY18 FY19E FY20E FY21E PROFITABILITY % EBITDA Margin 86.4 86.3 84.5 82.6 82.6 EBIT Margin 69.0 73.1 74.8 71.3 71.0 APAT Margin 48.3 50.3 44.0 42.4 43.5 RoE 11.6 14.0 15.5 12.5 12.2 RoIC 11.3 15.7 22.0 18.6 18.7 RoCE 9.5 9.7 10.9 9.4 9.5 EFFICIENCY Tax Rate % 32.7 33.8 33.8 33.8 33.8 Fixed Asset Turnover (x) 0.3 0.4 0.5 0.4 0.4 Inventory (days) 40 34 27 27 27 Debtor (days) 43 34 34 34 34 Other Current Assets (days) 14 5 5 5 5 Payables (days) 50 48 48 48 48 Other Current Liab & Provns (days) 64 73 54 62 62 Cash Conversion Cycle (days) (17) (48) (37) (44) (45) Net Debt/EBITDA (x) (0.2) 2.3 1.4 1.3 0.9 Net D/E (0.0) 0.5 0.4 0.3 0.2 Interest Coverage 0.1 0.0 0.2 0.2 0.2 PER SHARE DATA (Rs) EPS 8.8 11.9 14.8 13.3 14.2 CEPS 12.0 15.0 18.1 16.8 18.0 Dividend 0.8 1.3 1.7 1.6 1.8 Book Value 80.0 90.1 101.4 111.1 121.5 VALUATION P/E (x) 20.4 15.1 12.2 13.6 12.7 P/Cash EPS (x) 15.0 12.0 10.0 10.7 10.0 P/BV (x) 2.3 2.0 1.8 1.6 1.5 EV/EBITDA (x) 11.2 11.1 7.8 8.3 7.6 EV/Revenue (x) 9.7 9.6 6.6 6.8 6.3 Dividend Yield (%) 0.5 0.7 0.9 0.9 1.0 OCF/EV (%) 9.1 7.2 8.6 9.2 9.5 FCFE/EV (%) 7.7 4.6 5.8 6.2 6.4 FCFE/M Cap (%) 2.6 29.4 4.9 2.2 2.4



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RECOMMENDATION HISTORY

Rating Definitions

BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

150

160

170

180

190

200

210

Mar

-18

Apr-

18

May

-18

Jun-

18

Jul-1

8

Aug-

18

Sep-

18

Oct

-18

Nov-

18

Dec-

18

Jan-

19

Feb-

19

Mar

-19

Gujarat State Petronet TPDate CMP Reco Target

14-Mar-19 180 BUY 207


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Disclosure: We, Nilesh Ghuge, MMS and Divya Singhal, CA, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. Any holding in stock –No HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475. Disclaimer: This report has been prepared by HDFC Securities Ltd and is meant for sole use by the recipient and not for circulation. The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. 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In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. HSL may from time to time solicit from, or perform broking, or other services for, any company mentioned in this mail and/or its attachments. HSL and its affiliated company(ies), their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. 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HSL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Research entity has not been engaged in market making activity for the subject company. Research analyst has not served as an officer, director or employee of the subject company. We have not received any compensation/benefits from the subject company or third party in connection with the Research Report. HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066 Compliance Officer: Binkle R. Oza Email: [email protected] Phone: (022) 3045 3600 HDFC Securities Limited, SEBI Reg. No.: NSE-INB/F/E 231109431, BSE-INB/F 011109437, AMFI Reg. No. ARN: 13549, PFRDA Reg. No. POP: 04102015, IRDA Corporate Agent License No.: HDF 2806925/HDF C000222657, SEBI Research Analyst Reg. No.: INH000002475, CIN - U67120MH2000PLC152193 Mutual Funds Investments are subject to market risk. Please read the offer and scheme related documents carefully before investing.

mailto:[email protected]


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HDFC securities Institutional Equities Unit No. 1602, 16th Floor, Tower A, Peninsula Business Park, Senapati Bapat Marg, Lower Parel, Mumbai - 400 013 Board : +91-22-6171 7330www.hdfcsec.com

buy - hdfc securities state petronet...the construction of a 380km long greenfield mumbai-vadodara...

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