RESULT UPDATE MORNING INSIGHT Sumit Pokharna sumit.pokharna@kotak.com +91 22 6218 6438 Summary table (Rs mn) FY17 FY18E FY19E Sales 10,276 12,210 12,945 Growth (%) 3.6 18.8 6.0 EBIDTA 8,883 10,638 11,284 EBIDTA margin (%) 86.4 87.1 87.2 PBT 7,284 9,181 9,821 Net profit 4,713 6,151 6,580 EPS (Rs) 9.6 11.6 12.4 Growth (%) 16.0 21.6 6.5 CEPS (Rs) 12.7 15.0 15.9 BV (Rs/Share) 78.9 87.4 96.0 DPS (Rs) 1.5 2.0 2.5 ROE (%) 12.6 13.8 13.3 ROCE (%) 11.6 13.9 13.7 Net Cash (debt) 3,015 6,626 10,735 NWC (Days) 78 78 78 EV/Sales (x) 9.5 7.7 7.0 EV/EBIDTA (x) 11.0 8.8 8.0 P/E (x) 18.7 15.4 14.5 P/BV (x) 2.3 2.0 1.9 P/CEPS (X) 14.0 12.0 11.2, Kotak Securities Private Client Research GUJARAT STATE PETRONET LTD (GSPL) PRICE: RS.179 RECOMMENDATION: ACCUMULATE TARGET PRICE: RS.189 FY19E PE: 14.5X Pipeline tariff revision and higher gas volumes are the key triggers in medium term GSPL s Q1FY18 result is higher than our estimates. GSPL reported PAT of Rs.1.5 bn (as against our estimate of Rs.1.3 bn), higher 20% qoq and 26% yoy mainly on account of higher gas transmission volume, lower operating expenses and lower finance cost. Gas transmission volume has increased by 15% qoq (base effect) and 7% yoy to 26.9 mmsmcd due to lower spot LNG prices. However, gas transmission tariffs have decreased 3% qoq but up 8% yoy to Rs.1.157/mmscmd. GSPL s board has approved equity investment of 11% in Swan LNG Pvt. Ltd. Going forward, we expect the Company to benefit on account of both 1). Higher gas transmission volumes and 2). Expected upward revision in tariffs. Higher gas transmission volumes will be supported by 1) lower LNG prices, and 2) RLNG demand from the power sector. Additionally, rising city gas distribution growth opportunities, potential shift to natural gas due to environmental/pollution norms (industrial/cng) and volumes from Mundra LNG terminal (FY18 onwards) provides support to long term volumes. We expect GSPL to report an EPS of Rs.11.6 and cash EPS of Rs.15 for FY18E and an EPS of Rs.12.4 and cash EPS of Rs.15.9 for FY19E. We maintain ACCUMULATE (BUY on dips) on GSPL with a DCF based price target of Rs.189/share (earlier Rs.182). Quarterly Table GSPL (Rs.mn) Q1FY18 Q1FY17 YoY (%) Q4FY17 QoQ (%) Gross Revenue 2,976 2,598 15 2,587 15 Less: Discount, etc 12.5 16.8 (26) 141 (91) Discount (%) 0.42 0.65 (0.2) 5.45 (5.0) Net Sales/Income from ops 2,963 2,581 15 2,446 21 Total Expenditure 204 248 (18) 433 (53) EBIDTA 2,760 2,333 18 2,013 37 Depreciation 430 430 (0) 460 (7) EBIT 2,330 1,903 22 1,553 50 Other income 164 144 14 273 (40) Interest-net 106 167 (37) 116 (9) PBT 2,389 1,881 27 1,710 40 Tax 864 668 29 441 96 PAT 1,525 1,213 26 1,270 20 Basic EPS (Rs) 2.71 2.15 26 2.25 20 Cash EPS (Rs.) 3.47 2.92 19 3.07 13 Source: company Performance Analysis GSPL (Rs.mn) Q1FY18 Q1FY17 YoY (%) Q4FY17 QoQ (%) Gas Transported: Volume Gas Transported (MMSCMD) 26.9 25.1 6.9 23.4 15.0 Gas Transported in each Quarter 2,447 2,289 6.9 2,104 16.3 Implied Tariff Rs per 1000 SCM 1157 1073 8 1157 (3.3) Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 12
Key developments In the short to medium term, we expect earnings will be supported by incremental power sector gas demand/higher tariffs and in the long term, we expect commissioning of the 5 mtpa Mundra terminal (as well as Dahej and Hazia terminal) would provide meaningful upside to gas transmission volumes, improving pipeline utilization rates. Venturing into city gas distribution network GSPL, India s second largest gas transmission company (by length (2348 kms) and transmission volumes), is spreading its wings and is in process of implementing city gas distribution (CGD) network in Amritsar district (Punjab) awarded by PNGRB in May 2015. Further, PNGRB has granted authorization to GSPL for developing city gas distribution (CGD) network in the geographical area Bhatinda district (Punjab) in May, 2016. GSPL has two subsidiary companies 1) GSPL India Gasnet Limited (GIGL) for development of Mehsana Bhatinda (~1670 Kms) and Bhatinda - Jammu - Srinagar (~740 Kms) pipeline projects and 2) GSPL India Transco Limited (GITL) for development of Mallavaram - Bhopal Bhilwara Vijaipur (~1881 Kms) pipeline project awarded by PNGRB. These two subsidiaries have received all major statutory approvals for development of the pipeline. GIGL & GITL have initiated process for implementing the projects. However, construction activities are yet to commence. Cross country gas transmission pipelines to be implemented GSPL Gas Grid Map Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 13
APTEL quashed PNGRB s previous order on GSPL's pipeline tariffs Potential upward revision in tariffs for GSPL s high and low pressure natural gas pipeline networks Added shine: GSPL has indicated that PNGRB is in the process of re-determining the levelized tariff for GSPL s high pressure and low pressure natural gas pipeline networks pursuant to APTEL decision on the appeal filed by GSPL. Brief background: APTEL quashed PNGRB s previous order on GSPL's pipeline tariffs. Earlier, APTEL has asked PNGRB to a). Include the latest available data for tariff computations, (b) Revisit key parameters which have adversely impacted the tariffs, and (c) Ensure a reasonable return of 12% post-tax RoCE for gas transmission pipelines over the life of the asset, as required by the regulations for tariff calculations. Hence, we expect a potential upward revision in pipeline tariffs by PNGRB. We await PNGRB s final decision on gas pipeline tariffs and expect upward tariff revision. Rs/mmbtu High-pressure gas grid network Pipeline tariff computation by PNGRB (11th Sep'12) Levelized tariffs proposed by GSPL 39.55 Total moderations/reductions by PNGRB (15.56) Levelized tariff computed by PNGRB (Gross calorific value basis) -20 Nov'08 till 11th Mar 2026 23.99 Change in date of applicability (From date of authorization of pipeline instead of date of notification of the tariff regulation) 2.59 Revised levelized tariff computed by PNGRB (27th July'2012 till 11th March 2026) 26.58 Source: PNGRB and Company Result Analysis: Revenue: Despite 3% qoq decrease in pipeline tariff, GSPL s net revenue for Q1FY18 increased 21% qoq to Rs.2.96 bn (+15% yoy) mainly on account of increase in gas transportation volume. Implied tariff decreased 3% qoq but up 8% yoy to Rs.1.157/mmscmd. However, natural gas transmission volumes increased 16% qoq to 2,447 mmscm (7% yoy). GSPL s quarterly gas volumes transport details MMSCM (LHS) YoY growth (%) (RHS) 2600 2289 2265 2414 2104 2447 10 1800 1000 2 200-600 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18-6 The Company s operating margin increased to 93% in Q1FY18, up by 1100 bps (base effect) qoq and 300 bps yoy. Increase in margin is mainly on account of significant decrease in operating & maintenance charges and employee cost. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 14
Margins (%) Q1FY18 Q4FY17 YoY (%) QoQ (%) Q4FY17 EBITDA Margin 93 90 3 11 82 EBIT Margin 79 74 5 15 63 Adj PAT Margin 51 47 4 (0) 52 Other Income/PBT 7 8 (1) (9) 16 Tax/PBT 36 36 1 10 26 Expenses (Rs. Mn) Q1FY18 Q4FY17 YoY (%) QoQ (%) Q4FY17 Staff costs 81 79 2 (10) 89 other Expenses 123 117 5 (64) 344 Total 204 248 (18) (53) 433 Expenses Ratio (%) Staff cost to Sales 2.7 3.1 (0) (1) 4 Operation and Man To Sales 4.2 4.5 (0) (10) 14 Operational profits increased 37% qoq and 18% yoy to Rs. 2.76 bn. Higher operating profit is on account of higher volumes, lower operation & maintenance charges, and lower employee cost. Depreciation cost decreased 7% qoq to Rs. 430 mn. Total capital employed is Rs.58 bn (flat yoy) as on 31st Mar 17. Other income decreased 40% qoq (base effect) to Rs.164 mn (+14% yoy). Other income mainly consist of dividend and interest income. Interest cost decreased by 9% qoq and 37% yoy to Rs.106 mn due to decline in total debt to Rs. 5 bn as on 31st March 17 v/s Rs.10.6 bn as on 31st March 16. GSPL s PBT increased 40% qoq to Rs.2.4 bn (+27% yoy) on account of higher operating income, lower depreciation and lower interest cost. PAT for Q1FY18 was at Rs.1.53 bn higher 20% qoq and 26% yoy basis resulting in quarterly EPS of Rs.2.71 and CEPS Rs.3.47. Key triggers for stocks: 1). Clarity about tariff 2). Commissioning of the gas transmission pipeline 3). Ramp-up in gas supply and 4). Rupee appreciation We maintain ACCUMULATE rating on Gujarat State Petronet Ltd with a price target of Rs.189 Valuation & Recommendation Going forward, we expect the Company to benefit on account of both 1). Higher gas transmission volumes and 2). Expected upward revision in tariffs. Higher gas transmission volumes will be supported by 1) lower LNG prices, and 2) RLNG demand from the power sector. Additionally, rising city gas distribution growth opportunities, potential shift to natural gas due to environmental/pollution norms (industrial / CNG) and volumes from Mundra LNG terminal (FY18 onwards) provides support to long term volumes. We expect GSPL to report an EPS of Rs.11.6 and cash EPS of Rs.15 for FY18E and an EPS of Rs.12.4 and cash EPS of Rs.15.9 for FY19E. We maintain ACCUMULATE (BUY on dips) on GSPL with a DCF based price target of Rs.189/share (earlier Rs.182). Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 15
Key risk remains Project execution risk Lower than expected gas off-take by consumers Delay in expected tariff hike by PNGRB Going forward the major growth in GSPL is expected to come from inter-state pipelines across Gujarat, Rajasthan, Maharashtra and Andhra Pradesh. Thus its returns are expected to be capped in the near term. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 16