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COMPANY RESEARCH REPORT October 28, 2010
COMPANY RESEARCH REPORT INITIATING COVERAGE
GUJARAT STATE PETRONET LIMITED
RECOMMENDATION: BUY
CMP: Rs. 116
1st TARGET: Rs. 128
2nd TARGET: Rs. 142
HOLDING PERIOD: 1-1.5 Years
RISK PROFILE: LOW
2010
BUSINESS SUMMARY
Gujarat State Petronet Ltd (GSPL), a GSPC group
company, is a pioneer in developing energy
transportation infrastructure and connecting
natural gas supply basins and LNG terminals to
growing markets. It is the only company in India to
transmit natural gas for its clients without trading
in it.
INVESTMENT RATIONALE / RISKS
As the world’s second largest growing economy in the world, India’s need for energy is huge. Overall macroeconomic conditions in the economy will set the demand for energy and the growth of energy demand. India has been enjoying higher growth rates since the early 1990s because of economic reforms. This growth will contribute to greater demand for energy. The robust growth outlook for the Indian economy and the resultant increase in the end - user consumption of the natural gas is expected to drive the natural gas market in the future. In this scenario, gas transmission business plays a momentous role linking the supply sources and the consumers both industrials and retail.
Talking about the GSPL, it is the second largest gas transporter in the country, concentrating in Gujarat: India’s most industrialized state. The current grid operations of GSPL account for 1,666 km in the state and another 1100km pipeline is underway. What makes GSPL a good bet is that it had made a bid for four interstate projects (Total length: 5724 Km) with which its network will get quadrupled and the financial are expected to have substantial growth.
Meanwhile, GSPL’s growth plans would be impacted if the company faces regulatory delays in authorization for installing new pipelines. Any delay in execution and construction of new pipelines would also impact the profitability of GSPL.
(In Crores) FY09 FY10 FY11E FY12E
SALES 487.50 991.97 1030.09 1111.43
PAT 123.41 413.77 453.90 502.47
EPS 2.19 7.36 8.07 8.93
PE 53.26 15.88 14.48 13.08
Source: Multiple Sources
Sector: Gas Transmission EPS (TTM): Rs.7.46 PE (TTM): 15.56 Industry PE: 18.88 Mkt. Cap: 6531.42 52 Wk high: Rs.128.25 52 Wk low: Rs.82 P/BV: 4.18 Beta: 0.90 Yield (%): 0.86 Face Value: 10.00 Debt/Equity: 0.86 Institutional Holding: 12.28%
NSE Code: GSPL
BSE Code: 532702
ISIN Code: INE7246F01010
Reuters Code: GSPT.BO
Bloomberg Code: GUJS IN
Website:
www.gujaratpetro.com
COMPANY RESEARCH REPORT December 29, 2010
Contents
BRIEF PROFILE .............................................................................................................................................................................. 1
COMPANY ADDRESS................................................................................................................................................................. 1
TOP MANAGEMENT ................................................................................................................................................................. 1
BUSINESS ...................................................................................................................................................................................... 2
PIPELINES ................................................................................................................................................................................. 2
SPUR LINES ............................................................................................................................................................................... 3
Gujarat Gas Grid ....................................................................................................................................................................... 3
Expanding Outside Gujarat: National Grid ............................................................................................................................... 4
Presence in City Gas Distribution through Associates ............................................................................................................. 5
GSPL GAS GRID MAP ................................................................................................................................................................ 5
Entering Wind Energy Business ............................................................................................................................................... 6
SECTOR ......................................................................................................................................................................................... 6
OUTLOOK AND SCOPE .................................................................................................................................................................. 8
FINANCIALS AND VALUATIONS .................................................................................................................................................... 9
HISTORICAL FINANCIALS .......................................................................................................................................................... 9
FINANCIAL OUTLOOK ............................................................................................................................................................. 10
RISKS ........................................................................................................................................................................................... 11
INVESTMENT RATIONALE ........................................................................................................................................................... 11
FINANCIAL HIGHLIGHTS ............................................................................................................................................................. 13
FINANCIAL RATIOS ..................................................................................................................................................................... 14
FINANCIALS GRAPH AND PEER GROUP COMPARISON .............................................................................................................. 15
ANALYST NOTES AND COMPANY NEWS .................................................................................................................................... 16
COMPANY RESEARCH REPORT December 29, 2010
1
BRIEF PROFILE
Gujarat State Petronet Ltd (GSPL), a GSPC group
company, is a pioneer in developing energy
transportation infrastructure and connecting natural
gas supply basins and LNG terminals to growing
markets. It is the only company in India to transmit
natural gas for its clients without trading in it.
Gujarat State Petronet Limited was set up to
complement the efforts of GSPC . It has taken
initiative in developing energy transportation
infrastructure in Gujarat and connecting major
natural gas supply sources and demand markets.
GSPC recognized Gujarat’s concern for infrastructure
development in order to support the future
hydrocarbon economy and industry. The company
incorporated Gujarat State Petronet to develop a
high-pressure pipeline network for natural gas
transportation in Gujarat. The company has received
ISO 9001: 2000 certification for operation and
maintenance. GSPL is the only natural gas
transmission company in India that operates on
‘open access’ basis, i.e. it transports gas on behalf of
third party shippers in return for a transport fee.
GSPL’s existing gas transmission network comprises
1,666 km of medium to high pressure pipelines
connecting natural gas supply points at Hazira and
Dahej to consumption points covering the districts of
Ahmedabad, Anand, Baroda, Bharuch, Gandhinagar
and Surat. The majority of GSPL’s customers are
power, fertilizer, chemical and steel plants that
purchase natural gas directly from suppliers, as well
as several local city gas distribution companies who
supply natural gas to retail consumers.
COMPANY ADDRESS
GSPL, GSPC Bhavan,
5th
Floor, Behind Udyog Bhavan,
Sector 11, Gandhi Nagar- 382011
TOP MANAGEMENT
1. Chairman – A K Joti
2. Managing Director – Tapan Ray
3. Non Executive Director - D J Pandian
4. Non Executive Director- Athanu
Chakrabarthy
5. Independent Director – Suresh Mathur
6. Independent Director –R. Vaidyanathan
7. Independent Director – J K Jain
8. Company Secretary – Reena Desai
COMPANY RESEARCH REPORT December 29, 2010
2
BUSINESS
GSPL's primary operation is to connect various
supply sources and users of natural gas in Gujarat
through gas pipeline network. It is the only pipeline
infrastructure company operating on an open access
basis. Currently, GSPL operates a medium-to-high
pressure gas transmission grid comprising
approximately 1666 km of natural gas pipeline.
While GSPC harnesses and procures natural gas,
GSPL is building the infrastructure that transmits the
gas across the state of Gujarat and ultimately allows
last-mile linkage to the end-user. GSPL is
continuously expanding its pipeline network in
Gujarat to reach the demand centers by laying gas
pipeline network. The company has signed gas
transmission agreements (GTAs) with various
industries for the supply of natural gas. The
company has developed requisite expertise and
confidence with proven project management
competencies. The gas grid is equipped with the
latest bi-directional gas transmission technology to
enable two-way gas flow. This introduces a lot of
flexibility into transmission by allowing gas to be
sourced or uploaded at either end of the pipeline
network. Another innovation is in the open access or
contract carrier principle of transmission. This allows
any gas transmission company to approach GSPL for
permission to use the network on payment of the
required charges. Thus, private sector participation
in gas transmission is encouraged, which makes
more volumes available for consumers. GSPL has
already put in place a pipeline network of about
1666 km and has been expanding its network and
expects to complete the construction of approx.
1100 kilometers of pipelines during the next 2 - 3
years. Further, the Company also continues to
develop several other spur lines to connect
remaining industrial clusters and medium size
customers along the pipeline network in Gujarat.
GSPL sources its gas either from the gas fields of
GSPC and other companies, or from Liquefied
Natural Gas (LNG) terminals at Shell’s Hazira,
Petronet’s Dahej, Reliance’s KG basin. GSPL has a
mixture of long-
term as well as
interruptible
gas
transmission
contracts with
its customers.
The Gas
Transmission
Agreements
(GTAs) that GSPL enters into with its customers
designate the entry and exit points for the natural
gas as it travels through its gas transmission network
and provide for terms such as tariff, tenure and
capacity reserved in its network. Tariff primarily
consists of capacity charges, which are fixed fees for
the reservation of capacity and typically cover 90%
of the customer’s tariff commitment and commodity
charges which are linked to the actual transportation
of natural gas through its gas transmission network.
GSPL’s GTAs include ‘ship or pay’ provisions which
require its customers to pay the capacity charge for
the capacity reserved by them regardless of the
actual volume of natural gas they transport. This
provides a strong visibility and sustainability to its
revenues.
PIPELINES
GSPL’s is the second largest gas transmission
network in India. GSPL’s pipelines are connected to
the major gas supply sources in Gujarat including
It is the only pipeline
infrastructure company
operating on an open access
basis. Currently, GSPL operates
a medium-to-high pressure gas
transmission grid comprising
approximately 1666 km of
natural gas pipeline.
COMPANY RESEARCH REPORT December 29, 2010
3
designated collection points near the natural gas
fields of Cairn Energy, GSPC and GSPC Niko, all
located in Hazira, Shell’s Hazira, Petronet’s Dahej,
Reliance’s D6 field of KG basin. GSPL has a
transmission capacity of 50 mmscmd and transmits
36.7 mmscmd of gas of which over 64% is sourced
from RIL KG D 6, 25% from Petronet LNG and rest
from GSPC, Cairn India and PMT. The company has
1666 kms of gas pipeline in operation from Hazira –
Vadodra - Ahmedabad - Kalol – Himmatnagar-
Mehsana- Rajkot- Morbi- Anjar-Jamnagar. The gas
grid of the Company has reached to 16 of 26 districts
in Gujarat. The Company is currently expanding its
network and expects to complete the construction of
approximate 1100 kilometers of pipelines during the
next 2 – 3 years. GSPL’s pipeline network, currently,
lies in the Gujarat state only.
Major Pipelines in Operation Year
Commissioned Pipeline Length
(In Km) 2000-01 Hazira - Mora 14 2001-02 Amboli - Dahej 45 2002-03 Mora - Utran 25
Bhadhut - Paguthan 26 2003-04 Paguthan - Baroda 64 2004-05 Baroda - Ahmedabad -
Kalol 143
Mora - Sajod 58 Kalol - Santej 15
2006-07 Mora - Vapi 138 Anand - Rajkot 294 Kalol - Mehsana 47 Kalol - Himmatnagar 63
2007-08 Padamla - Halol 37 2008-09 Rajkot - Jamnagar 110 2009-10 Olpad- Utran 17 2010-11 Gana-Hadala 85
Morbi- Mundra 130 Source: Company
SPUR LINES
GSPL has special
pipelines meant
for industrial
clusters and
medium and big
sized industrial
customers. These
kinds of lines
constitute a
notable part of
the total
network. Since Gujarat is a huge gas supply sources,
it has a good proximity to the industrial centers in
the state. Spur lines have been impressively grown
on the back of high paced industrialization in the
state. The present spur lines have been connecting
the industrial houses like Essar Steel, Torrent Power,
Raymonds, Welspun and Alok Industries, GNFC,
Videocon, Khribco, Utran, GACL, GFL, GSECL
Dhuvaran, Sumangalam Glass, Ajanta
Manufacturing, Euro Ceramics, Metrade etc… The
Company also continues to develop several spur
lines to connect remaining industrial clusters and
medium size customers along the pipeline network
in Gujarat like Hindustan Glass, Birla Copper, Tata
Motors Nano plant etc…
Gujarat Gas Grid
GSPL is now implementing a Gas Grid Project in the
state of Gujarat, which envisages transporting
indigenous natural gas from production centers and
LNG from terminals to demand centers all over
Gujarat through a high pressure trunk pipeline. It is a
pipeline transmission project to deliver gas to end
The Company is currently
expanding its network and
expects to complete the
construction of approximate
1100 kilometers of pipelines
during the next 2 – 3 years.
GSPL’s pipeline network,
currently, lies in the Gujarat
state only.
COMPANY RESEARCH REPORT December 29, 2010
4
users and for local distribution. Under this, the
following pipelines have been proposed:
Bharuch‐Jamnagar (300Kms)
Dahod‐Pipavav (250 Kms)
Baroda‐Halol (60 Kms)
Morbi‐Mundra (250 Kms)
Under this, GSPL is setting up a 2,500km pipeline for
gas transportation. It already has a 1,666 km pipeline
network in place. It is executing this pipeline
network expansion project in two phases. Phase‐I
involves investment of INR12bn and covers a
distance of 525km from Vadnagar, in north Gujarat,
to Vapi, in the south of the state. Phase‐II involves
extending the network to Saurashtra,
Surendranagar, Rajkot and Jamnagar. The length of
this segment is 600km and involves an investment of
INR20bn.
Expanding Outside Gujarat: National Grid
It has been the biggest factor for the company that it
has won the bid for the two cross country pipelines
namely Mallavaram-Bhilwara (1,600 KM), Mehsana-
Bhatinda (1,670 km) and become the most
competitive bidder for the Bhatinda-Jammu-Srinagar
(740 km).
With this, the
company is
extending its
reach outside
Gujarat. The
total length of
these
pipelines
would be
6,420km. This
is in a consortium with IOC, HPCL and BPCL. In the
consortium, the GSPL’s share is 52% while IOC has
26% and HPCL and BPCL have 11% each. At present,
GSPL has its gas grid network only within Gujarat
and for first time it is stepping outside state. PNGRB
is expected to soon issue the Letter of Authorization
(LOA) to the GSPL-led consortium. The pipelines are
to be completed in 3 years from the date of issuance
of Letter of Authorization. Development of these
crucial pipeline networks will contribute significantly
towards the evolution of the much awaited National
Gas Grid. The three pipelines are estimated to be
built at a initial capital expenditure of Rs12,500 crore
having initial capacity to carry around 100 Million
Metric Standard Cubic Metres per Day of gas which
will traverse through states of Andhra Pradesh,
Maharashtra, Madhya Pradesh, Gujarat, Rajasthan,
Haryana, NCR, Punjab and Jammu & Kashmir. The
new pipelines will be connected to the existing
Gujarat grid thereby creating an integrated network
covering approximately 1/3rd of the country's
geography enabling flow of gas from multiple gas
sources to principal demand centres. These pipelines
are expected to receive the gas from the sources like
Petronet LNG’s Dahej, Shell’s Hazira, GSPC Mundra
GSPL led consortium has won
the bid for the two cross country
pipelines namely Mallavaram-
Bhilwara (1,600 KM), Mehsana-
Bhatinda (1,670 km) and become
the most competitive bidder for
the Bhatinda-Jammu-Srinagar
(740 km). With this, the
company is extending its reach
outside Gujarat.
COMPANY RESEARCH REPORT December 29, 2010
5
terminal and GSPC’s and RIL’s discovery in the KG
Gas basin.
GSPL has also established a comprehensive
operations and maintenance procedure to monitor
and maintain the health of its gas grid. This
procedure includes 24 hour supervision of the entire
pipeline through a SCADA system, monthly and
quarterly field inspections of the pipeline and yearly
patrolling of the entire length of the pipeline to
monitor soil erosion, possible encroachments and
detection of pipeline leakage.
Presence in City Gas Distribution through
Associates
The company has a strong presence in City gas
distribution services too. It has a stake in two city
gas distribution companies: GSPC Gas Co. Ltd. and
Sabarmati Gas Ltd. Sabarmati Gas, a JV between
BPCL and GSPC, was incorporated in Jun 2006 to set
up the CGD project in Mehsana, Gandhinagar and
Himmatnagar. Besides GSPL’s 36.51% stake in GSPC
Gas, GSPC holds 62% stake and GUJS’s seven largest
gas consumers hold the remaining stake. The stake
of GSPL in the Sabarmati gas has been 13.75%.
GSPL GAS GRID
MAP
Source: Company
COMPANY RESEARCH REPORT December 29, 2010
6
Entering Wind Energy Business
GSPL has entered the energy sector too. From FY10,
It has begun to sell it out to third parties. A total of
52.5 MW wind power project in the areas of Maliya
Miyana, Rajkot and Gorsar, Porbandar is in progress
out of which 6MW has already been completed in
the FY10 itself. The project is expected to complete
the by FY12.
SECTOR
In 2009, India was the world’s fourth largest
consumer of energy, behind the United States,
China, and Russia. As per a Report by CRISIL Risk &
Infrastructure Solutions Limited, named Indian Gas
Market Assessment, February 2010 (“CRISIL Report”)
India‘s consumption of energy, on a per capita basis,
was one of the lowest in the world in 2009. Over the
past few years, demand for energy has risen in India
along with India‘s economic growth. Gas is currently
a minor fuel in the overall energy mix in India.
However, gas consumption is expected to grow at
4.2% per year on an average from 2006 to 2030.
(Source: Energy Information Administration,
International Energy Outlook 2009). The main factors
for increase in gas consumption are expected to be
macroeconomic conditions and policies, the price
and availability of alternative fuels, the expansion of
gas related infrastructure, the development of
policies in respect of carbon emissions, the
identification of new uses of gas, programmes for
the implementation of city gas distribution networks
and the fast evolving regulatory environment. It is
expected that natural gas will continue to play a
predominant role in sectors like power generation,
fertilizer, CNG & PNG distribution, refineries and
commercial segments and virtually in all the
industrial sectors. Overall demand in India for gas is
projected to increase from 209.6 mmscmd in the
financial year 2010 to 343.5 mmscmd in the financial
year 2015 and 464.4 mmscmd in the financial year
2023 (Source: CRISIL Report). In fact many other
reports indicate such growth potential for India’s gas
market. Currently, Gujarat alone accounts for
approximately 40% of the gas demand in the
Country. Demand for gas in Gujarat is projected to
grow from 85.4 mmscmd in the financial year 2010
to 122.0 mmscmd in the financial year 2015 (Source:
CRISIL Report). In Gujarat, many industries are
switching over to gas for their fuel and feedstock
requirements. The expansion of the gas grid into
new markets has resulted in substantial conversion
from alternate liquid fuels to gas as well as increase
in the demand for gas through expansion of
capacities of existing projects, setting up of new
industries and development of City Gas Distribution
networks in Gujarat. With the commencement of
new discoveries in the eastern coast of India, the
demand from new regions is expected to increase.
Domestic gas production is projected to increase
from 177 mmscmd in 2010 to 227 mmscmd in 2023
(Source: CRISIL Report). This increase in production is
expected to arise from announced or new
discoveries of gas reserves, adding production to
existing fields. Domestic production may also be
supplemented in the future from LNG imports,
production from coal bed methane fields, shale gas
etc. (Source: CRISIL, Report) In fact, even in 2009-10,
the actual supply and consumption of gas could have
been higher but for the capacity constraints in the
existing trunk pipelines.
COMPANY RESEARCH REPORT December 29, 2010
7
Presently, the total trunk pipeline
network is 11,070 km
Here, Transmission pipelines are the most vital
segment, as they connect supply sources with
demand regions. Companies which own transmission
pipelines, sign Gas Transmission Agreement with
E&P companies, LNG Terminals, marketing
companies and other major end-users to provide
access to their pipeline network. Transmission
companies are immune from the fluctuation in gas
prices as they do not purchase the gas but merely
transport the gas. The gas supply is governed by Gas
Sales Agreements between sellers and buyers.
Profitability of transmission companies is governed
by transmission tariff and capacity utilization of its
network. Presently the total trunk pipeline network
is 11,070 km. The pipelines are owned and operated
by central and state public sector undertaking, and
also private companies.
The increased clarity over
future supply volumes, to
certain extent, removed
uncertainties lingering over
sustainable and uninterrupted gas supply and
resulted in increased participation from private
companies. Reliance Gas Transportation
Infrastructure Limited (RGTIL) constructed a 1,385
km long East-West pipeline (EWPL), country’s second
longest gas pipeline after GAIL’s Hazira-Vijaipur-
Jagdishpur (HVJ), to evacuate natural gas produced
from Reliance Industries Limited’s Krishna Godavari
(KG) basin. After commissioning of the EWPL, India’s
current gas transmission network stands at 11,394
km (GAIL – 6,986 km, GSPL – 1,666 km, RGTIL – 1,385
km, others – 1,357 km) with capacity of 273.8
mmscmd. . The gas pipeline network is spread across
Gujarat, Maharashtra, Rajasthan, Madhya Pradesh,
Uttar Pradesh, Delhi, Haryana, Andhra Pradesh,
Tamil Nadu, Tripura and Assam. Among other
regional pipelines, Assam Gas Company has a
prominent pipeline network in north‐east India. In
addition to its 250km pipeline linking Sibsagar to
Margherita, Assam; it has over 350km of branch
pipelines in the region. But this network is
insufficient to meet the increased supply and
demand. To link the both, Gas transmission has to
develop faster than earlier. It may be noted that the
current capacity exceeds the gas supplies of 115.5
mmscmd, but does not indicate adequacy of current
infrastructure, as (a) the HVJ-Dahej- Vijaipur pipeline
(DVPL) network, main supply trunk-line to northern
region, has already been operating at full capacity
and cannot take any additional gas requirement (b)
technically, capacities of gas transmission network
along with its spur lines, when expressed in
volumetric terms, are not
additive and would result in
double counting. A number of
gas discoveries have been made
in the Eastern region, while
historic industrial development has been in the
West. The distance between demand and supply
centers is bound to be a hindrance, if the gas
network is not developed properly. With the existing
LNG terminals at Dahej and Hazira, besides the
upcoming ones at Kochi, Dabhol, Mangalore and
Ennore, there is an urgent need to develop the
transmission lines connecting different states. While
the local distribution system may be developed over
time, along with demand growth, the transmission
system needs to be developed to enable various gas
producers and LNG importers to reach the market.
COMPANY RESEARCH REPORT December 29, 2010
8
OUTLOOK AND SCOPE
The outlook for gas is very promising with the
demand from various industrial sectors looking
spectacular. Gas demand’s growth in the past was
mainly on the back of the demand from industries
like Power and fertilizers, which are likely to
continue dominating natural gas demand in the
coming years too. A number of power projects such
as Torrent Power’s (TPW) plant at Sugen, National
Thermal Power Corporation’s (NATP) plants at
Kawas and Gandhar in Gujarat and Reliance Power’s
(RPWR) plant at Dadri, Uttar Pradesh, are likely to be
commissioned in the next three to four years. Thus,
gas demand from the power sector is likely to
increase in a big way. Besides that, a large number of
fertilizer plants still operate on fuel oil and naphtha.
Fertilizer plants such as Gujarat Narmada Valley
Fertilizers (GNFC IN, NR) at Bharuch, Indian Farmers
Fertilizer Cooperative’s (IFFCO) plant at Kalol and
Gujarat State Fertilizers and Chemicals’ (GSFC) plant
at Baroda are still getting lower than requirements.
Thus, gas demand in the fertilizer sector is also likely
to be driven by higher demand from gas‐based
plants and plants that are looking to convert their
feedstock. To take advantage of all these, GSPL is
expanding its network in Gujarat to 2,500 km as a
part of Gujarat grid and has won bid for setting up
cross country pipelines of 6,420km, which is the
company’s first stepping up outside the state.
Gujarat State Petronet Ltd (GSPL) will be one of the
major beneficiaries of increased gas availability in
India. GSPL’s extensive gas transmission network
and additional expansion of its pipeline network in
the next two years will contribute significantly to the
volume growth. Further, more than one-third of the
production from D6 gas fields of RIL’s field in KG
Basin coming in to Gujarat is transported through
GSPL’s pipeline
network. The
company has
signed long
term contracts
with various
customers
across several
sectors, for
transmission of
gas from RIL KG Basin fields. Further, the Company is
developing several other spur lines to connect
remaining industrial clusters and medium size
customers along the pipeline network in Gujarat.
Besides, the emergence of new supply regions and
sources necessitates the development of a national
interconnected pipeline network. As a part of that,
GSPL planned to set up pan–India pipelines, to take
advantage of the significant increase in supply
volumes.
With those, its total network will cross 5600km.
Moreover, the Company holds significant equity
interest in City gas distribution (CGD) companies,
Interstate Pipelines for which
GSPL led consortium has bid
and become most competitive
bidder
Length
(In Km)
Mallarvaram (Andhra Pradesh) –
Bhilwara (Rajasthan) (formally won
the bid)
1600
Mehsana(Gujrath)- Bhatinda (Punjab) 1670
Bhatinda - Jammu 740
GSPL holds 13.75% in Sabarmati
Gas Ltd. and 36.51% in GSPC Gas
Co. Ltd. It is noteworthy to
mention that Sabarmati Gas Ltd.
(0.7 mmscmd) and GSPC Gas Co.
Ltd. (3.0 mmscmd) together are
among the largest CGDs in the
Country.
COMPANY RESEARCH REPORT December 29, 2010
9
which have natural synergy with gas transmission
business. GSPL holds 13.75% in Sabarmati Gas Ltd.
and 36.51% in GSPC Gas Co. Ltd. It is noteworthy to
mention that Sabarmati Gas Ltd. (0.7 mmscmd) and
GSPC Gas Co. Ltd. (3.0 mmscmd) together are among
the largest CGDs in the Country. It is expected that
with the expansion of gas transmission pipelines and
CGD infrastructure, these CGD companies would also
continue to grow, going forward. The company also
has connectivity to all major natural gas sources in
Gujarat.
GSPL’s ability to cater to demand centres and
increase in domestic supplies of gas from Petronet
LNG and Reliance KG D6 basin will drive gas
transmission volumes at a faster space in the coming
years. GSPL’s gas transmission volume has jumped
from 14.9 mmscmd in FY09 to 36 mmscmd in FY10.
We believe GSPL will be one of the prime
beneficiaries of increased gas availability in India.
The commencement of gas production from the
Reliance KG-D6 field will be the key growth driver for
the company over the some years. The gas
transmission volume from Reliance was 10.7
mmscmd in FY10 and likely to be 14.8 mmscmd in
FY11E. The additional gas supply from the new
Petronet LNG capacity of 5 MTPA and higher
capacity utilization of Shell’s LNG terminal will also
contribute to the volume growth for GSPL in the next
two years. Over the past year, gas stocks have
outperformed the Sensex by 25%; the
outperformance is likely to continue for the next
year. Transmission and distribution businesses have
network exclusivity for 25 years and marketing
exclusivity for 5 years as gas infrastructure is yet to
be developed in India. We believe this exclusivity
clause is likely to help pipeline and CGD companies
report robust RoEs and RoCEs for the next four to
five years.
FINANCIALS AND VALUATIONS
HISTORICAL FINANCIALS
The historical financials gives a good picture of the
company’s well paced journey. Both the top line and
bottom line have grown in a greater momentum
with the former grew at CAGR of 46.18% during FY07
and FY10 and the latter jumped at 66% during the
period. It was the FY10 during which the figures, be
it top line or
bottom line,
got doubled
increasing at
three digit
rate. . It is
noteworthy
that the total
operating
expenditure to
sales ratio was
a mere 6%. As
a Capex
oriented business, depreciation has been the big
daddy in the expenditure book. For the FY10,
depreciation was 23% as percentage of sales. The
margins, too, are dazzling with the EBIDTA and PAT
reads at 96% and 41% respectively in the FY10. As
usual, what makes the difference in the EBTDA and
PAT are mainly Tax and depreciation followed by the
interest expense. The company has been keeping the
tax rate at an average of 34%. GSPL also provides
more than 23% of the sales for the depreciation,
which is by depreciating its pipeline assets at an
average of 8%. As the indicator of increase in the
GSPL’s Income from
Transportation of gas, which is
the primary operation of the
company, reached Rs. 991.95
crore, recording an increase of
103% over last year’s figure of
Rs. 487.50 crore. Meanwhile the
bottom line was Rs. 413.77 crore
compared to Rs. 123.41 crores in
the previous year, recording an
increase of 235.28%.
COMPANY RESEARCH REPORT December 29, 2010
10
operating efficiency, the operating expenditure grew
at a CAGR of mere 7.7% only during the FY07-FY10.
To be worthwhile, the Gross Block of Assets has also
increased from Rs. 2421.18 crores to Rs. 3325.49
crores and consequently there has been an increase
in Depreciation from Rs. 170.49 crores to Rs. 236.49
crores. Talking about the profitability figures, as
already mentioned, its profitability ratios stood
outstanding with
an EBITDA margin
of 96% and PAT
was at 41%. The
performance
ratios like ROE
and ROCE have
also shot up in the
FY10 in tandem
with the jump in
the company’s
performance,
with the same lies
at 30% and 28%
respectively. It is
also worth
mentioned that
its wind energy
division has also
started contribute
the top line in the
last fiscal. These
are better among the peers. With the forte of the
kind of business, GSPL’s debt equity ratio was at 0.86
times. Meanwhile it has been maintaining dazzling
interest coverage ratio (7.68 times). As a sign of
growing business, GSPL has been retaining 86%
(Payout ratio: 14%) of the earnings with it and had
paid 10% dividend for FY10. From a valuation
perspective, GSPL is trading at 15.88 times of its FY10
earnings, which doesn’t seem to be expensive while
that of the gas distribution industry stands at 18.8
times. Because of the jump in the overall financials
of the company in the FY10, the EPS had shot up and
the valuation has also become quite impressive.
FINANCIAL OUTLOOK
Looking forward, the revenues are expected to step
up 3.8% and 8% for the FY11 and FY12 respectively
on a year on year basis i.e. at a CAGR of 5.8%.
Meanwhile beyond the FY12, the prospect looks to
be spectacular when the cross country pipelines get
commissioned. The opportunities are eternal in the
proposed pipelines but these will take at least 36
months to commission. Since good figures have been
reported in the last fiscal, we cannot see the same
paced momentum in the next two years. There are
no such major pipelines, expected to be operational
within 2 years, under execution. The prospect the
other operating income (Sale of electricity) for the
next fiscal is expected at 11.73 crore and is likely to
register 358% for the FY12 as the current ongoing
energy projects are expected to be operational by
then.
The bottom line, too, are expected to grow at 9.7%
and 10.7% respectively (YoY) for the period. For the
next two years, it would be the employee cost and
other manufacturing expenses to occupy major
space in the expenditure book as the proposed
bigger projects will get started. We don’t expect any
major changes in other operating expenditure
components like power and fuel cost, General and
administration expenses, selling and distribution and
miscellaneous expenses, which likely to grow only as
FINANCIAL OUTLOOK
The top line is expected to
grow at a CAGR of 6% from
FY10 to FY12.
The bottom line is expected
to grow at a CAGR of 10.2%
from FY10 to FY12.
Depreciation as a proportion
of sales which stood at 23%
For FY10 is expected to
remain at that level the next
2 years.
Other manufacturing
expenses as a % of sales is
likely to average around 3%
for the next 2 years.
The FY12 EPS is forecasted
to reach Rs. 8.93
COMPANY RESEARCH REPORT December 29, 2010
11
in the past. With the growth in the bottom line, the
PAT margin is expected to reach 45% in the FY12.
Talking about depreciation, the company has been
depreciating the pipelines in 12 years (around 8%) as
against the actual economic life period of 30 years.
So for the initial years, the bottom line won’t reflect
the actual earnings. Meanwhile, the benefit of this
can be reaped after some years.
With the growth in the forecasted earnings (9.7%
and 10.7% in the FY11 and FY12 respectively), the
forward PEs looked to be decreasing trend with the
same for the period works out to 14.48 and 12.92
respectively. In the coming years, the increased
availability of the gas and increasing pipeline
infrastructure gives an assurance to the top line as
well as bottom line.
RISKS
Gas Supply Risk: GSPL’s profitability and valuations
may be negatively impacted on lower than expected
gas supply volumes. Currently, natural gas has better
economics against alternative fuels like naphtha and
fuel oil. However, any competitiveness of alternative
fuels vis-à-vis natural gas would impact the volumes
of GSPL. The sourcing of gas from the producers has
also a chance of being impacted. Delay in
authorization and construction of new pipelines:
GSPL’s growth plans would be impacted if the
company faces regulatory delays in authorization for
installing new pipelines. Any delay in execution and
construction of new pipelines would also impact the
profitability of GSPL. Regulatory risk: Petroleum and
Natural Gas Regulatory Board (PNGRB) has been set
up for the determination of transmission tariffs and
authorization of gas transportation pipelines. If
GSPL’s transmission tariffs are lower than expected,
this will have an impact on the financial performance
of the company. Recently, there is a move from the
government side to make the tariff cheaper which is
likely to push up the volumes with low margins. As
of now, the tariff is under the full control of PNGRB
(Petroleum and Natural Gas Regulatory Board).
GSPL’s failure
to comply
with
prescribed
technical
parameters
may also
result in a
heavy fine and
the company
coming under
the scanner of
the regulator.
Proposed
Social Tax (Gujarat government CSR at 30%): The
Gujarat government has proposed 30% CSR on pre-
tax profits on state-owned companies. GSPL’s
contribution towards Gujarat Socio-Economic
Development Society will have an impact on the
earnings and valuations of the company.
INVESTMENT RATIONALE
As the world’s second largest growing economy in
the world, India’s need for energy is huge. The role
of industry in the growth of economy can never be
ignored. The role of energy lies there to support the
industry whether it be manufacturing or else. In
2009, India was the world’s fourth largest consumer
of energy, behind the United States, China, and
Russia. Overall macroeconomic conditions in the
economy will set the demand for energy and the
growth of energy demand. India has been enjoying
RISKS
Gas Supply Risk
Delay in authorization
and construction of new
pipelines
Regulatory risk
Proposed Social Tax
(Gujarat government
CSR at 30%)
COMPANY RESEARCH REPORT December 29, 2010
12
higher growth rates since the early 1990s because of
economic reforms. This growth will contribute to
greater demand for energy. The robust growth
outlook for the Indian economy and the resultant
increase in the end–user consumption of the natural
gas is expected to drive the natural gas market in the
future. The main factors for increase in gas
consumption are expected to be macroeconomic
conditions and policies, the price and availability of
alternative fuels, the expansion of gas related
infrastructure, the development of policies in respect
of carbon emissions, the identification of new uses
of gas, programmes for the implementation of city
gas distribution networks and the fast evolving
regulatory environment. Gujarat by far is the most
developed gas market in the country. Currently,
Gujarat accounts for approximately 32% gas
consumption in the country. The per capita
consumption of natural gas in India is only around 29
SCM as compared to the world average of 363 SCM.
There is clear room for growth even accounting for
the fact that gas may not be able to displace coal in
the power sector to the extent it may have in other
developed countries. In this scenario, gas
transmission business plays a momentous role
linking the supply sources and the consumers both
industrials and retail. Higher amount of availability
of the resources (Gas) and the impressive growth in
the pipeline infrastructure in the state also shore up
the rationale to invest in the sector. Presently, gas
accounts for 10% of total energy consumption in
India, while the world average is 24%. Historically,
there has always been a huge gas deficit in the
country. However, with the estimated increase in gas
supply from new domestic discoveries and new LNG
capacities, we estimate gas demand to increase
substantially. Faster growth is estimated from CGD
(City Gas Distribution) and from refineries and
petrochemicals, which are trying to reduce their fuel
costs and losses. The current grid operations of GSPL
account for 1,666 km in the state. GSPL had made a
bid for four projects —Mallavaram-Bhilwara (1,600
KM), Mehsana- Bhatinda (1,670 km), Bhatinda-
Jammu-Srinagar (740 km) and Surat-Paradip (1,680
Km). Of these four pipeline projects, PNGRB had
invited bids for the first three projects and GSPL has
won the first two and has become the most
competitive bidder for the remaining. These projects
stand as the most supporting pillars, calling for an
investment in the company. Besides, the company
has impressive profitability figures with the ROE
stands at 29%, ROCE at 27% and ROA at 17%. These
are better among the peers. As a sign of growing
business, GSPL has been retaining 86% (Payout ratio:
14%) of the earnings with it and had paid 10%
dividend for FY10. In short, with good prospects of
growth, the stock is trading at levels where one can
enter for a long term. In the coming years, the
increased availability of the gas and increasing
pipeline infrastructure gives an assurance to the top
line as well as bottom line. Another area to be
looked at is that the company's transmission
volumes will pick up in upcoming quarters as the
supply sources would become very active when the
KG Basin’s production picks up. Beyond two years
(FY12), the scenario is quite promising with the
interstate pipelines. When the pipelines become
operational; it would be a turning point in the
company’s journey.
In short, since the downside risk is, comparatively,
low, even those who are risk averse in nature can
enter the stock with a one year to one and half year
perspective.
COMPANY RESEARCH REPORT December 29, 2010
13
FINANCIAL HIGHLIGHTS
Description FY10 FY09 FY08 FY07 FY06
Inc / Exp Performance
Gross Sales 991.97 487.50 417.90 317.56 263.47
Total Income 1019.52 511.81 447.30 335.36 267.99
Total Expenditure 62.31 62.85 53.42 49.84 69.31
PBIDT 957.21 448.95 393.88 285.52 198.68
PBIT 720.72 278.47 230.66 182.91 119.62
PBT 626.89 191.35 149.15 137.26 78.41
PAT 413.77 123.41 99.92 89.38 46.68
Cash Profit 650.26 293.90 263.14 191.99 125.74
Sources of Funds
Equity Paid Up 562.45 562.12 562.01 542.80 542.24
Reserves and Surplus 1001.38 653.08 578.95 423.11 365.26
Net Worth 1563.48 1211.86 1134.62 956.59 895.18
Total Debt 1259.55 1150.95 966.05 863.83 578.63
Capital Employed 2823.02 2362.81 2100.67 1820.43 1473.81
Application of Funds
Gross Block 3325.49 2421.18 2019.05 1888.92 980.51
Investments 66.58 35.58 35.58 0.00 0.00
Cash and Bank balance 174.17 97.47 256.93 181.12 237.20
Net Current Assets -78.50 28.40 39.08 209.25 159.59
Total Current Liabilities 833.42 533.14 510.60 184.46 177.08
Total Assets 2823.37 2366.15 2107.00 1829.75 1486.13
Cash Flow
Cash Flow from Operations 886.22 203.77 601.84 161.15 244.59
Cash Flow from Investing activities -761.73 -428.28 -621.85 -440.42 -604.93
Cash Flow from Finance activities -47.78 65.05 95.82 223.19 554.93
Free Cash flow -269.43 4.37 -569.13 -142.68 -526.25
Market Cues
Close Price (Unit Curr.) 87.50 38.30 56.15 46.75 36.65
High Price (Unit Curr.) 104.00 74.40 114.45 57.80 47.25
Low Price (Unit Curr.) 38.50 25.25 47.00 26.50 34.80
Market Capitalization 4921.43 2152.90 3155.67 2537.61 1987.32
EPS 7.36 2.20 1.78 1.65 0.86
Price / Book Value(x) 3.15 1.78 2.78 2.65 2.22
CEPS 11.56 5.23 4.68 3.54 2.32
Equity Dividend % 10.00 7.50 5.00 5.00 2.50
Enterprise Value 6006.80 3206.38 3864.78 3220.32 2328.74
Dividend Yield % 1.14 1.96 0.89 1.07 0.68 Source: Ace Equity
COMPANY RESEARCH REPORT December 29, 2010
14
FINANCIAL RATIOS
Description FY10 FY09 FY08 FY07 FY06
Operational & Financial Ratios Earnings Per Share (Rs) 7.36 2.2 1.78 1.65 0.86
Adjusted EPS (Rs.) 7.36 2.2 1.78 1.65 0.86
CEPS(Rs) 11.56 5.23 4.68 3.54 2.32
Adj DPS(Rs) 1 0.75 0.5 0.5 0.25
Book Value (Rs) 27.8 21.56 20.19 17.62 16.51
Adjusted Book Value (Rs) 27.8 21.56 20.19 17.62 16.51
Tax Rate(%) 34 35.51 33.01 34.88 40.47
Dividend Pay Out Ratio(%) 13.59 34.16 28.12 30.36 29.04
Margin Ratios PBIDTM (%) 96.5 92.09 94.25 89.91 75.41
EBITM (%) 72.66 57.12 55.2 57.6 45.4
Pre Tax Margin(%) 63.2 39.25 35.69 43.22 29.76
PATM (%) 41.71 25.32 23.91 28.15 17.72
CPM(%) 65.55 60.29 62.97 60.46 47.72
Performance Ratios ROA (%) 15.95 5.52 5.08 5.39 4
ROE (%) 29.82 10.52 9.56 9.65 7.22
ROCE (%) 27.8 12.48 11.77 11.1 10.31
Asset Turnover(x) 0.38 0.22 0.21 0.19 0.23
Inventory Turnover(x) 8.81 7.37 9.96 7.91 11.03
Debtors Turnover(x) 15.3 10.16 10.92 13.06 21.6
Sales/Fixed Asset(x) 0.35 0.22 0.21 0.22 0.28
Efficiency Ratios Fixed Capital/Sales(x) 2.9 4.55 4.68 4.52 3.52
Receivable days 23.85 35.93 33.42 27.94 16.9
Inventory Days 41.44 49.52 36.64 46.17 33.08
Payable days 554.98 676.03 511.17 361.8 235.93
Growth Ratios Net Sales Growth(%) 103.48 16.66 31.6 20.53 29.48
Core EBITDA Growth(%) 113.21 13.98 37.95 43.71 51.24
EBIT Growth(%) 158.82 20.73 26.11 52.91 82.01
PAT Growth(%) 235.27 23.51 11.79 91.49 190.91
EPS Growth(%) 235.08 23.49 7.97 91.29 87.75
Financial Stability Ratios Total Debt/Equity(x) 0.87 0.9 0.88 0.78 0.79
Current Ratio(x) 1.56 1.5 1.31 2.91 2.17
Quick Ratio(x) 1.28 1.25 1.21 2.58 1.93
Interest Cover(x) 7.68 3.2 2.83 4.01 2.9
COMPANY RESEARCH REPORT December 29, 2010
15
FINANCIALS GRAPH AND PEER GROUP COMPARISON
Source: Multiple Sources
Company Name Year End
Net Sales PBIDT PAT EPS(Unit
Curr) PBIDTM% PATM% ROCE% ROE%
Eastern Gases FY10 38.4 1.84 0.47 0.67 4.79 1.23 15.44 6.71
GAIL India FY10 24996.4 5210.29 3139.8 24.75 20.53 12.37 27.15 19.89
Mahanagar Gas Ltd.
FY10 639.4 262.92 147.01 16.45 37.37 20.89 34.32 23.41
Rel. NatRes FY10 270.02 167.08 69.87 0.43 61.88 25.88 5.34 3.96
Guj. Petronet FY10 991.9 957.21 413.7 7.36 96.5 41.71 27.8 29.82
Source: Ace Equity
Source: Ace Equity
COMPANY RESEARCH REPORT December 29, 2010
16
December 29, 2010
Pipeline companies may be able to charge a lower tariff rate than determined by the board. The Board has proposed amending the PNGRB (Determination of Natural Gas Pipeline Tariff) Regulations, 2008, and has invited comments from stakeholders and experts. The issue came up in a pre-bid conference for pipelines and some bidders had wanted to know if they could offer a rate lower than what was determined by the Board.
ANALYST NOTES AND COMPANY NEWS
COMPANY RESEARCH REPORT December 29, 2010
17
Researched and prepared by:
Muhammed Aslam E
Fundamental Analyst
Email: [email protected]
Ph: (0484) 3040400, 3040419
In co-operation with:
Amar Chandramohan Sr. Fundamental Analyst Email: [email protected]
Krishnan Thampi K
Head of Research and Strategies
Email: [email protected]
HEDGE RESEARCH & STRATEGIES GROUP
Head of Research: Krishnan Thampi K
Sr. Fundamental Analyst: Amar Chandramohan
Jr. Fundamental Analyst: Muhammed Aslam E
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