2010                       COMPANY RESEARCH REPORT October 28, 2010       COMPANY RESEARCH REPORT          INITIATING COVE...
BUSINESS SUMMARY                                                       Sector: Gas Transmission      NSE Code:      GSPLGu...
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Gspl initiating coverage

  1. 1. 2010 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
  2. 2. BUSINESS SUMMARY Sector: Gas Transmission NSE Code: GSPLGujarat State Petronet Ltd (GSPL), a GSPC group EPS (TTM): Rs.7.46company, is a pioneer in developing energy PE (TTM): 15.56 BSE Code: 532702 Industry PE: 18.88transportation infrastructure and connecting Mkt. Cap: 6531.42 ISIN Code: INE7246F01010natural gas supply basins and LNG terminals to 52 Wk high: Rs.128.25 52 Wk low: Rs.82 Reuters Code: GSPT.BOgrowing markets. It is the only company in India to P/BV: 4.18transmit natural gas for its clients without trading Beta: 0.90 Bloomberg Code: GUJS IN Yield (%): 0.86in it. Face Value: 10.00 Website: Debt/Equity: 0.86 www.gujaratpetro.com INVESTMENT RATIONALE / RISKS Institutional Holding: 12.28%As the world’s second largest growing economy inthe world, India’s need for energy is huge. Overallmacroeconomic conditions in the economy will set (In Crores) FY09 FY10 FY11E FY12Ethe demand for energy and the growth of energy SALES 487.50 991.97 1030.09 1111.43demand. India has been enjoying higher growth PAT 123.41 413.77 453.90 502.47rates since the early 1990s because of economic EPS 2.19 7.36 8.07 8.93reforms. This growth will contribute to greater PE 53.26 15.88 14.48 13.08demand for energy. The robust growth outlook forthe Indian economy and the resultant increase inthe end - user consumption of the natural gas isexpected to drive the natural gas market in thefuture. In this scenario, gas transmission businessplays a momentous role linking the supply sourcesand the consumers both industrials and retail.Talking about the GSPL, it is the second largest gastransporter in the country, concentrating inGujarat: India’s most industrialized state. Thecurrent grid operations of GSPL account for 1,666km in the state and another 1100km pipeline isunderway. What makes GSPL a good bet is that ithad made a bid for four interstate projects (Totallength: 5724 Km) with which its network will getquadrupled and the financial are expected to havesubstantial growth.Meanwhile, GSPL’s growth plans would beimpacted if the company faces regulatory delays inauthorization for installing new pipelines. Anydelay in execution and construction of newpipelines would also impact the profitability ofGSPL. Source: Multiple Sources
  3. 3. December 29, COMPANY RESEARCH REPORT 2010 ContentsBRIEF PROFILE .............................................................................................................................................................................. 1 COMPANY ADDRESS................................................................................................................................................................. 1 TOP MANAGEMENT ................................................................................................................................................................. 1BUSINESS ...................................................................................................................................................................................... 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 ............................................................................................................................................... 6SECTOR ......................................................................................................................................................................................... 6OUTLOOK AND SCOPE.................................................................................................................................................................. 8FINANCIALS AND VALUATIONS .................................................................................................................................................... 9 HISTORICAL FINANCIALS .......................................................................................................................................................... 9 FINANCIAL OUTLOOK ............................................................................................................................................................. 10RISKS........................................................................................................................................................................................... 11INVESTMENT RATIONALE........................................................................................................................................................... 11FINANCIAL HIGHLIGHTS ............................................................................................................................................................. 13FINANCIAL RATIOS ..................................................................................................................................................................... 14FINANCIALS GRAPH AND PEER GROUP COMPARISON .............................................................................................................. 15ANALYST NOTES AND COMPANY NEWS .................................................................................................................................... 16
  4. 4. December 29, COMPANY RESEARCH REPORT 2010 BRIEF PROFILE Gujarat State Petronet Ltd (GSPL), a GSPC group COMPANY ADDRESScompany, is a pioneer in developing energy GSPL, GSPC Bhavan,transportation infrastructure and connecting natural th 5 Floor, Behind Udyog Bhavan,gas supply basins and LNG terminals to growingmarkets. It is the only company in India to transmit Sector 11, Gandhi Nagar- 382011natural gas for its clients without trading in it.Gujarat State Petronet Limited was set up tocomplement the efforts of GSPC . It has takeninitiative in developing energy transportationinfrastructure in Gujarat and connecting majornatural gas supply sources and demand markets.GSPC recognized Gujarat’s concern for infrastructuredevelopment in order to support the future TOP MANAGEMENThydrocarbon economy and industry. The company 1. Chairman – A K Jotiincorporated Gujarat State Petronet to develop a 2. Managing Director – Tapan Rayhigh-pressure pipeline network for natural gastransportation in Gujarat. The company has received 3. Non Executive Director - D J PandianISO 9001: 2000 certification for operation and 4. Non Executive Director- Athanumaintenance. GSPL is the only natural gas Chakrabarthytransmission company in India that operates on‘open access’ basis, i.e. it transports gas on behalf of 5. Independent Director – Suresh Mathurthird party shippers in return for a transport fee. 6. Independent Director –R. VaidyanathanGSPL’s existing gas transmission network comprises 7. Independent Director – J K Jain1,666 km of medium to high pressure pipelinesconnecting natural gas supply points at Hazira and 8. Company Secretary – Reena DesaiDahej to consumption points covering the districts ofAhmedabad, Anand, Baroda, Bharuch, Gandhinagarand Surat. The majority of GSPL’s customers arepower, fertilizer, chemical and steel plants thatpurchase natural gas directly from suppliers, as wellas several local city gas distribution companies whosupply natural gas to retail consumers. 1
  5. 5. December 29, COMPANY RESEARCH REPORT 2010 BUSINESS remaining industrial clusters and medium size customers along the pipeline network in Gujarat.GSPLs primary operation is to connect various GSPL sources its gas either from the gas fields ofsupply sources and users of natural gas in Gujarat GSPC and other companies, or from Liquefiedthrough gas pipeline network. It is the only pipeline Natural Gas (LNG) terminals at Shell’s Hazira,infrastructure company operating on an open access Petronet’s Dahej, Reliance’s KG basin. GSPL has abasis. Currently, GSPL operates a medium-to-high mixture of long-pressure gas transmission grid comprising It is the only pipeline term as well asapproximately 1666 km of natural gas pipeline. infrastructure company interruptibleWhile GSPC harnesses and procures natural gas, operating on an open access gasGSPL is building the infrastructure that transmits the basis. Currently, GSPL operates transmissiongas across the state of Gujarat and ultimately allows a medium-to-high pressure gas contracts withlast-mile linkage to the end-user. GSPL is transmission grid comprising its customers.continuously expanding its pipeline network in approximately 1666 km of The GasGujarat to reach the demand centers by laying gas natural gas pipeline. Transmissionpipeline network. The company has signed gas Agreementstransmission agreements (GTAs) with various (GTAs) that GSPL enters into with its customersindustries for the supply of natural gas. The designate the entry and exit points for the naturalcompany has developed requisite expertise and gas as it travels through its gas transmission networkconfidence with proven project management and provide for terms such as tariff, tenure andcompetencies. The gas grid is equipped with the capacity reserved in its network. Tariff primarilylatest bi-directional gas transmission technology to consists of capacity charges, which are fixed fees forenable two-way gas flow. This introduces a lot of the reservation of capacity and typically cover 90%flexibility into transmission by allowing gas to be of the customer’s tariff commitment and commoditysourced or uploaded at either end of the pipeline charges which are linked to the actual transportationnetwork. Another innovation is in the open access or of natural gas through its gas transmission network.contract carrier principle of transmission. This allows GSPL’s GTAs include ‘ship or pay’ provisions whichany gas transmission company to approach GSPL for require its customers to pay the capacity charge forpermission to use the network on payment of the the capacity reserved by them regardless of therequired charges. Thus, private sector participation actual volume of natural gas they transport. Thisin gas transmission is encouraged, which makes provides a strong visibility and sustainability to itsmore volumes available for consumers. GSPL has revenues.already put in place a pipeline network of about1666 km and has been expanding its network and PIPELINESexpects to complete the construction of approx. GSPL’s is the second largest gas transmission1100 kilometers of pipelines during the next 2 - 3 network in India. GSPL’s pipelines are connected toyears. Further, the Company also continues to the major gas supply sources in Gujarat includingdevelop several other spur lines to connect 2
  6. 6. December 29, COMPANY RESEARCH REPORT 2010designated collection points near the natural gas SPUR LINESfields of Cairn Energy, GSPC and GSPC Niko, all GSPL has speciallocated in Hazira, Shell’s Hazira, Petronet’s Dahej, pipelines meant The Company is currentlyReliance’s D6 field of KG basin. GSPL has a for industrial expanding its network andtransmission capacity of 50 mmscmd and transmits clusters and expects to complete the36.7 mmscmd of gas of which over 64% is sourced medium and big construction of approximatefrom RIL KG D 6, 25% from Petronet LNG and rest sized industrial 1100 kilometers of pipelinesfrom GSPC, Cairn India and PMT. The company has customers. These during the next 2 – 3 years.1666 kms of gas pipeline in operation from Hazira – kinds of lines GSPL’s pipeline network,Vadodra - Ahmedabad - Kalol – Himmatnagar- constitute a currently, lies in the GujaratMehsana- Rajkot- Morbi- Anjar-Jamnagar. The gas notable part of state only.grid of the Company has reached to 16 of 26 districts the totalin Gujarat. The Company is currently expanding its network. Since Gujarat is a huge gas supply sources,network and expects to complete the construction of it has a good proximity to the industrial centers inapproximate 1100 kilometers of pipelines during the the state. Spur lines have been impressively grownnext 2 – 3 years. GSPL’s pipeline network, currently, on the back of high paced industrialization in thelies in the Gujarat state only. state. The present spur lines have been connecting the industrial houses like Essar Steel, Torrent Power, Raymonds, Welspun and Alok Industries, GNFC, Major Pipelines in Operation Videocon, Khribco, Utran, GACL, GFL, GSECL Year Pipeline Length Dhuvaran, Sumangalam Glass, Ajanta Commissioned (In Km) Manufacturing, Euro Ceramics, Metrade etc… The 2000-01 Hazira - Mora 14 Company also continues to develop several spur 2001-02 Amboli - Dahej 45 2002-03 Mora - Utran 25 lines to connect remaining industrial clusters and Bhadhut - Paguthan 26 medium size customers along the pipeline network 2003-04 Paguthan - Baroda 64 in Gujarat like Hindustan Glass, Birla Copper, Tata 2004-05 Baroda - Ahmedabad - 143 Motors Nano plant etc… Kalol Mora - Sajod 58 Kalol - Santej 15 2006-07 Mora - Vapi 138 Gujarat Gas Grid Anand - Rajkot 294 GSPL is now implementing a Gas Grid Project in the Kalol - Mehsana 47 Kalol - Himmatnagar 63 state of Gujarat, which envisages transporting 2007-08 Padamla - Halol 37 indigenous natural gas from production centers and 2008-09 Rajkot - Jamnagar 110 LNG from terminals to demand centers all over 2009-10 Olpad- Utran 17 Gujarat through a high pressure trunk pipeline. It is a 2010-11 Gana-Hadala 85 Morbi- Mundra 130 pipeline transmission project to deliver gas to end Source: Company 3
  7. 7. December 29, COMPANY RESEARCH REPORT 2010users and for local distribution. Under this, the (740 km). GSPL led consortium has wonfollowing pipelines have been proposed: With this, the the bid for the two cross country company is pipelines namely Mallavaram-  Bharuch‐Jamnagar (300Kms) extending its Bhilwara (1,600 KM), Mehsana-  Dahod‐Pipavav (250 Kms) reach outside Bhatinda (1,670 km) and become  Baroda‐Halol (60 Kms) Gujarat. The the most competitive bidder for  Morbi‐Mundra (250 Kms) total length of the Bhatinda-Jammu-Srinagar these (740 km). With this, theUnder this, GSPL is setting up a 2,500km pipeline for pipelines company is extending its reachgas transportation. It already has a 1,666 km pipeline would be outside Gujarat.network in place. It is executing this pipeline 6,420km. Thisnetwork expansion project in two phases. Phase‐I is in a consortium with IOC, HPCL and BPCL. In theinvolves investment of INR12bn and covers a consortium, the GSPL’s share is 52% while IOC hasdistance of 525km from Vadnagar, in north Gujarat, 26% and HPCL and BPCL have 11% each. At present,to Vapi, in the south of the state. Phase‐II involves GSPL has its gas grid network only within Gujaratextending the network to Saurashtra, and for first time it is stepping outside state. PNGRBSurendranagar, Rajkot and Jamnagar. The length of is expected to soon issue the Letter of Authorizationthis segment is 600km and involves an investment of (LOA) to the GSPL-led consortium. The pipelines areINR20bn. 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 networkExpanding Outside Gujarat: National Grid covering approximately 1/3rd of the countrysIt has been the biggest factor for the company that it geography enabling flow of gas from multiple gashas won the bid for the two cross country pipelines sources to principal demand centres. These pipelinesnamely Mallavaram-Bhilwara (1,600 KM), Mehsana- are expected to receive the gas from the sources likeBhatinda (1,670 km) and become the most Petronet LNG’s Dahej, Shell’s Hazira, GSPC Mundracompetitive bidder for the Bhatinda-Jammu-Srinagar 4
  8. 8. December 29, COMPANY RESEARCH REPORT 2010terminal and GSPC’s and RIL’s discovery in the KG Presence in City Gas Distribution throughGas basin. AssociatesGSPL has also established a comprehensive The company has a strong presence in City gasoperations and maintenance procedure to monitor distribution services too. It has a stake in two cityand maintain the health of its gas grid. This gas distribution companies: GSPC Gas Co. Ltd. andprocedure includes 24 hour supervision of the entire Sabarmati Gas Ltd. Sabarmati Gas, a JV betweenpipeline through a SCADA system, monthly and BPCL and GSPC, was incorporated in Jun 2006 to setquarterly field inspections of the pipeline and yearly up the CGD project in Mehsana, Gandhinagar andpatrolling of the entire length of the pipeline to Himmatnagar. Besides GSPL’s 36.51% stake in GSPCmonitor soil erosion, possible encroachments and Gas, GSPC holds 62% stake and GUJS’s seven largestdetection of pipeline leakage. gas consumers hold the remaining stake. The stake of GSPL in the Sabarmati gas has been 13.75%. GSPL GAS GRID MAP Source: Company 5
  9. 9. December 29, COMPANY RESEARCH REPORT 2010 Entering Wind Energy BusinessGSPL has entered the energy sector too. From FY10, industrial sectors. Overall demand in India for gas isIt has begun to sell it out to third parties. A total of projected to increase from 209.6 mmscmd in the52.5 MW wind power project in the areas of Maliya financial year 2010 to 343.5 mmscmd in the financialMiyana, Rajkot and Gorsar, Porbandar is in progress year 2015 and 464.4 mmscmd in the financial yearout of which 6MW has already been completed in 2023 (Source: CRISIL Report). In fact many otherthe FY10 itself. The project is expected to complete reports indicate such growth potential for India’s gasthe by FY12. market. Currently, Gujarat alone accounts for approximately 40% of the gas demand in the SECTOR Country. Demand for gas in Gujarat is projected toIn 2009, India was the world’s fourth largest grow from 85.4 mmscmd in the financial year 2010consumer of energy, behind the United States, to 122.0 mmscmd in the financial year 2015 (Source:China, and Russia. As per a Report by CRISIL Risk & CRISIL Report). In Gujarat, many industries areInfrastructure Solutions Limited, named Indian Gas switching over to gas for their fuel and feedstockMarket Assessment, February 2010 (“CRISIL Report”) requirements. The expansion of the gas grid intoIndia‘s consumption of energy, on a per capita basis, new markets has resulted in substantial conversionwas one of the lowest in the world in 2009. Over the from alternate liquid fuels to gas as well as increasepast few years, demand for energy has risen in India in the demand for gas through expansion ofalong with India‘s economic growth. Gas is currently capacities of existing projects, setting up of newa minor fuel in the overall energy mix in India. industries and development of City Gas DistributionHowever, gas consumption is expected to grow at networks in Gujarat. With the commencement of4.2% per year on an average from 2006 to 2030. new discoveries in the eastern coast of India, the(Source: Energy Information Administration, demand from new regions is expected to increase.International Energy Outlook 2009). The main factors Domestic gas production is projected to increasefor increase in gas consumption are expected to be from 177 mmscmd in 2010 to 227 mmscmd in 2023macroeconomic conditions and policies, the price (Source: CRISIL Report). This increase in production isand availability of alternative fuels, the expansion of expected to arise from announced or newgas related infrastructure, the development of discoveries of gas reserves, adding production topolicies in respect of carbon emissions, the existing fields. Domestic production may also beidentification of new uses of gas, programmes for supplemented in the future from LNG imports,the implementation of city gas distribution networks production from coal bed methane fields, shale gasand the fast evolving regulatory environment. It is etc. (Source: CRISIL, Report) In fact, even in 2009-10,expected that natural gas will continue to play a the actual supply and consumption of gas could havepredominant role in sectors like power generation, been higher but for the capacity constraints in thefertilizer, CNG & PNG distribution, refineries and existing trunk pipelines.commercial segments and virtually in all the 6
  10. 10. December 29, COMPANY RESEARCH REPORT 2010Here, Transmission pipelines are the most vital regional pipelines, Assam Gas Company has asegment, as they connect supply sources with prominent pipeline network in north‐east India. Indemand regions. Companies which own transmission addition to its 250km pipeline linking Sibsagar topipelines, sign Gas Transmission Agreement with Margherita, Assam; it has over 350km of branchE&P companies, LNG Terminals, marketing pipelines in the region. But this network iscompanies and other major end-users to provide insufficient to meet the increased supply andaccess to their pipeline network. Transmission demand. To link the both, Gas transmission has tocompanies are immune from the fluctuation in gas develop faster than earlier. It may be noted that theprices as they do not purchase the gas but merely current capacity exceeds the gas supplies of 115.5transport the gas. The gas supply is governed by Gas mmscmd, but does not indicate adequacy of currentSales Agreements between sellers and buyers. infrastructure, as (a) the HVJ-Dahej- Vijaipur pipelineProfitability of transmission companies is governed (DVPL) network, main supply trunk-line to northernby transmission tariff and capacity utilization of its region, has already been operating at full capacitynetwork. Presently the total trunk pipeline network and cannot take any additional gas requirement (b)is 11,070 km. The pipelines are owned and operated technically, capacities of gas transmission networkby central and state public sector undertaking, and along with its spur lines, when expressed inalso private companies. volumetric terms, are notThe increased clarity over Presently, the total trunk pipeline additive and would result infuture supply volumes, to network is 11,070 km double counting. A number ofcertain extent, removed gas discoveries have been madeuncertainties lingering over in the Eastern region, whilesustainable and uninterrupted gas supply and historic industrial development has been in theresulted in increased participation from private West. The distance between demand and supplycompanies. Reliance Gas Transportation centers is bound to be a hindrance, if the gasInfrastructure Limited (RGTIL) constructed a 1,385 network is not developed properly. With the existingkm long East-West pipeline (EWPL), country’s second LNG terminals at Dahej and Hazira, besides thelongest gas pipeline after GAIL’s Hazira-Vijaipur- upcoming ones at Kochi, Dabhol, Mangalore andJagdishpur (HVJ), to evacuate natural gas produced Ennore, there is an urgent need to develop thefrom Reliance Industries Limited’s Krishna Godavari transmission lines connecting different states. While(KG) basin. After commissioning of the EWPL, India’s the local distribution system may be developed overcurrent gas transmission network stands at 11,394 time, along with demand growth, the transmissionkm (GAIL – 6,986 km, GSPL – 1,666 km, RGTIL – 1,385 system needs to be developed to enable various gaskm, others – 1,357 km) with capacity of 273.8 producers and LNG importers to reach the market.mmscmd. . The gas pipeline network is spread acrossGujarat, Maharashtra, Rajasthan, Madhya Pradesh,Uttar Pradesh, Delhi, Haryana, Andhra Pradesh,Tamil Nadu, Tripura and Assam. Among other 7
  11. 11. December 29, COMPANY RESEARCH REPORT 2010 OUTLOOK AND SCOPE feedstock. To take advantage of all these, GSPL is expanding its network in Gujarat to 2,500 km as aThe outlook for gas is very promising with the part of Gujarat grid and has won bid for setting updemand from various industrial sectors looking cross country pipelines of 6,420km, which is thespectacular. Gas demand’s growth in the past was company’s first stepping up outside the state.mainly on the back of the demand from industrieslike Power and fertilizers, which are likely to Gujarat State Petronet Ltd (GSPL) will be one of thecontinue dominating natural gas demand in the major beneficiaries of increased gas availability incoming years too. A number of power projects such India. GSPL’s extensive gas transmission networkas Torrent Power’s (TPW) plant at Sugen, National and additional expansion of its pipeline network inThermal Power Corporation’s (NATP) plants at the next two years will contribute significantly to theKawas and Gandhar in Gujarat and Reliance Power’s volume growth. Further, more than one-third of the(RPWR) plant at Dadri, Uttar Pradesh, are likely to be production from D6 gas fields of RIL’s field in KGcommissioned in the next three to four years. Thus, Basin coming in to Gujarat is transported throughgas demand from the power sector is likely to GSPL’s pipelineincrease in a big way. Besides that, a large number of GSPL holds 13.75% in Sabarmati network. The Gas Ltd. and 36.51% in GSPC GasInterstate Pipelines for which Length company has Co. Ltd. It is noteworthy to signed long GSPL led consortium has bid (In Km) mention that Sabarmati Gas Ltd. term contractsand become most competitive with various (0.7 mmscmd) and GSPC Gas Co. bidder Ltd. (3.0 mmscmd) together are customers among the largest CGDs in the across severalMallarvaram (Andhra Pradesh) – Country. sectors, forBhilwara (Rajasthan) (formally won 1600 transmission ofthe bid) gas from RIL KG Basin fields. Further, the Company isMehsana(Gujrath)- Bhatinda (Punjab) 1670 developing several other spur lines to connect remaining industrial clusters and medium size Bhatinda - Jammu 740 customers along the pipeline network in Gujarat. Besides, the emergence of new supply regions andfertilizer plants still operate on fuel oil and naphtha. sources necessitates the development of a nationalFertilizer plants such as Gujarat Narmada Valley interconnected pipeline network. As a part of that,Fertilizers (GNFC IN, NR) at Bharuch, Indian Farmers GSPL planned to set up pan–India pipelines, to takeFertilizer Cooperative’s (IFFCO) plant at Kalol and advantage of the significant increase in supplyGujarat State Fertilizers and Chemicals’ (GSFC) plant volumes.at Baroda are still getting lower than requirements.Thus, gas demand in the fertilizer sector is also likely With those, its total network will cross 5600km.to be driven by higher demand from gas‐based Moreover, the Company holds significant equityplants and plants that are looking to convert their interest in City gas distribution (CGD) companies, 8
  12. 12. December 29, COMPANY RESEARCH REPORT 2010which have natural synergy with gas transmission report robust RoEs and RoCEs for the next four tobusiness. GSPL holds 13.75% in Sabarmati Gas Ltd. five years.and 36.51% in GSPC Gas Co. Ltd. It is noteworthy tomention that Sabarmati Gas Ltd. (0.7 mmscmd) and FINANCIALS AND VALUATIONSGSPC Gas Co. Ltd. (3.0 mmscmd) together are amongthe largest CGDs in the Country. It is expected that HISTORICAL FINANCIALSwith the expansion of gas transmission pipelines and The historical financials gives a good picture of theCGD infrastructure, these CGD companies would also company’s well paced journey. Both the top line andcontinue to grow, going forward. The company also bottom line have grown in a greater momentumhas connectivity to all major natural gas sources in with the former grew at CAGR of 46.18% during FY07Gujarat. and FY10 and the latter jumped at 66% during the period. It was the FY10 during which the figures, beGSPL’s ability to cater to demand centres and it top line orincrease in domestic supplies of gas from Petronet GSPL’s Income from bottom line,LNG and Reliance KG D6 basin will drive gas Transportation of gas, which is got doubledtransmission volumes at a faster space in the coming the primary operation of the increasing atyears. GSPL’s gas transmission volume has jumped company, reached Rs. 991.95 three digitfrom 14.9 mmscmd in FY09 to 36 mmscmd in FY10. crore, recording an increase of rate. . It isWe believe GSPL will be one of the prime 103% over last year’s figure of noteworthybeneficiaries of increased gas availability in India. Rs. 487.50 crore. Meanwhile the that the totalThe commencement of gas production from the bottom line was Rs. 413.77 crore operatingReliance KG-D6 field will be the key growth driver for expenditure to compared to Rs. 123.41 crores inthe company over the some years. The gas the previous year, recording an sales ratio wastransmission volume from Reliance was 10.7 increase of 235.28%. a mere 6%. Asmmscmd in FY10 and likely to be 14.8 mmscmd in a CapexFY11E. The additional gas supply from the new oriented business, depreciation has been the bigPetronet LNG capacity of 5 MTPA and higher daddy in the expenditure book. For the FY10,capacity utilization of Shell’s LNG terminal will also depreciation was 23% as percentage of sales. Thecontribute to the volume growth for GSPL in the next margins, too, are dazzling with the EBIDTA and PATtwo years. Over the past year, gas stocks have reads at 96% and 41% respectively in the FY10. Asoutperformed the Sensex by 25%; the usual, what makes the difference in the EBTDA andoutperformance is likely to continue for the next PAT are mainly Tax and depreciation followed by theyear. Transmission and distribution businesses have interest expense. The company has been keeping thenetwork exclusivity for 25 years and marketing tax rate at an average of 34%. GSPL also providesexclusivity for 5 years as gas infrastructure is yet to more than 23% of the sales for the depreciation,be developed in India. We believe this exclusivity which is by depreciating its pipeline assets at anclause is likely to help pipeline and CGD companies average of 8%. As the indicator of increase in the 9
  13. 13. December 29, COMPANY RESEARCH REPORT 2010operating efficiency, the operating expenditure grew perspective, GSPL is trading at 15.88 times of its FY10at a CAGR of mere 7.7% only during the FY07-FY10. earnings, which doesn’t seem to be expensive whileTo be worthwhile, the Gross Block of Assets has also that of the gas distribution industry stands at 18.8increased from Rs. 2421.18 crores to Rs. 3325.49 times. Because of the jump in the overall financialscrores and consequently there has been an increase of the company in the FY10, the EPS had shot up andin Depreciation from Rs. 170.49 crores to Rs. 236.49 the valuation has also become quite impressive.crores. Talking about the profitability figures, asalready mentioned, its profitability ratios stood outstanding with FINANCIAL OUTLOOK an EBITDA margin FINANCIAL OUTLOOK Looking forward, the revenues are expected to step of 96% and PAT  The top line is expected to up 3.8% and 8% for the FY11 and FY12 respectively was at 41%. The grow at a CAGR of 6% from on a year on year basis i.e. at a CAGR of 5.8%. performance FY10 to FY12. Meanwhile beyond the FY12, the prospect looks to ratios like ROE  The bottom line is expected be spectacular when the cross country pipelines get and ROCE have to grow at a CAGR of 10.2% commissioned. The opportunities are eternal in the also shot up in the from FY10 to FY12. proposed pipelines but these will take at least 36 FY10 in tandem  Depreciation as a proportion with the jump in months to commission. Since good figures have been of sales which stood at 23% reported in the last fiscal, we cannot see the same the company’s For FY10 is expected to paced momentum in the next two years. There are performance, remain at that level the next with the same lies no such major pipelines, expected to be operational 2 years. within 2 years, under execution. The prospect the at 30% and 28%  Other manufacturing other operating income (Sale of electricity) for the respectively. It is expenses as a % of sales is next fiscal is expected at 11.73 crore and is likely to also worth likely to average around 3% register 358% for the FY12 as the current ongoing mentioned that for the next 2 years. energy projects are expected to be operational by its wind energy  The FY12 EPS is forecasted then. division has also to reach Rs. 8.93 started contribute The bottom line, too, are expected to grow at 9.7% the top line in the and 10.7% respectively (YoY) for the period. For the last fiscal. These next two years, it would be the employee cost andare better among the peers. With the forte of the other manufacturing expenses to occupy majorkind of business, GSPL’s debt equity ratio was at 0.86 space in the expenditure book as the proposedtimes. Meanwhile it has been maintaining dazzling bigger projects will get started. We don’t expect anyinterest coverage ratio (7.68 times). As a sign of major changes in other operating expendituregrowing business, GSPL has been retaining 86% components like power and fuel cost, General and(Payout ratio: 14%) of the earnings with it and had administration expenses, selling and distribution andpaid 10% dividend for FY10. From a valuation miscellaneous expenses, which likely to grow only as 10
  14. 14. December 29, COMPANY RESEARCH REPORT 2010in the past. With the growth in the bottom line, the of the company. Recently, there is a move from thePAT margin is expected to reach 45% in the FY12. government side to make the tariff cheaper which isTalking about depreciation, the company has been likely to push up the volumes with low margins. Asdepreciating the pipelines in 12 years (around 8%) as of now, the tariff is under the full control of PNGRBagainst the actual economic life period of 30 years. (Petroleum and Natural Gas Regulatory Board).So for the initial years, the bottom line won’t reflect GSPL’s failurethe actual earnings. Meanwhile, the benefit of this to comply RISKScan be reaped after some years. with prescribedWith the growth in the forecasted earnings (9.7%  Gas Supply Risk technicaland 10.7% in the FY11 and FY12 respectively), the  Delay in authorization parametersforward PEs looked to be decreasing trend with the and construction of new may alsosame for the period works out to 14.48 and 12.92 pipelines result in arespectively. In the coming years, the increased  Regulatory risk heavy fine andavailability of the gas and increasing pipeline  Proposed Social Tax the companyinfrastructure gives an assurance to the top line as (Gujarat government coming underwell as bottom line. CSR at 30%) the scanner of the regulator. RISKS ProposedGas Supply Risk: GSPL’s profitability and valuations Social Tax (Gujarat government CSR at 30%): Themay be negatively impacted on lower than expected Gujarat government has proposed 30% CSR on pre-gas supply volumes. Currently, natural gas has better tax profits on state-owned companies. GSPL’seconomics against alternative fuels like naphtha and contribution towards Gujarat Socio-Economicfuel oil. However, any competitiveness of alternative Development Society will have an impact on thefuels vis-à-vis natural gas would impact the volumes earnings and valuations of the company.of GSPL. The sourcing of gas from the producers hasalso a chance of being impacted. Delay in INVESTMENT RATIONALEauthorization and construction of new pipelines: As the world’s second largest growing economy inGSPL’s growth plans would be impacted if the the world, India’s need for energy is huge. The rolecompany faces regulatory delays in authorization for of industry in the growth of economy can never beinstalling new pipelines. Any delay in execution and ignored. The role of energy lies there to support theconstruction of new pipelines would also impact the industry whether it be manufacturing or else. Inprofitability of GSPL. Regulatory risk: Petroleum and 2009, India was the world’s fourth largest consumerNatural Gas Regulatory Board (PNGRB) has been set of energy, behind the United States, China, andup for the determination of transmission tariffs and Russia. Overall macroeconomic conditions in theauthorization of gas transportation pipelines. If economy will set the demand for energy and theGSPL’s transmission tariffs are lower than expected, growth of energy demand. India has been enjoyingthis will have an impact on the financial performance 11
  15. 15. December 29, COMPANY RESEARCH REPORT 2010higher growth rates since the early 1990s because of (City Gas Distribution) and from refineries andeconomic reforms. This growth will contribute to petrochemicals, which are trying to reduce their fuelgreater demand for energy. The robust growth costs and losses. The current grid operations of GSPLoutlook for the Indian economy and the resultant account for 1,666 km in the state. GSPL had made aincrease in the end–user consumption of the natural bid for four projects —Mallavaram-Bhilwara (1,600gas is expected to drive the natural gas market in the KM), Mehsana- Bhatinda (1,670 km), Bhatinda-future. The main factors for increase in gas Jammu-Srinagar (740 km) and Surat-Paradip (1,680consumption are expected to be macroeconomic Km). Of these four pipeline projects, PNGRB hadconditions and policies, the price and availability of invited bids for the first three projects and GSPL hasalternative fuels, the expansion of gas related won the first two and has become the mostinfrastructure, the development of policies in respect competitive bidder for the remaining. These projectsof carbon emissions, the identification of new uses stand as the most supporting pillars, calling for anof gas, programmes for the implementation of city investment in the company. Besides, the companygas distribution networks and the fast evolving has impressive profitability figures with the ROEregulatory environment. Gujarat by far is the most stands at 29%, ROCE at 27% and ROA at 17%. Thesedeveloped gas market in the country. Currently, are better among the peers. As a sign of growingGujarat accounts for approximately 32% gas business, GSPL has been retaining 86% (Payout ratio:consumption in the country. The per capita 14%) of the earnings with it and had paid 10%consumption of natural gas in India is only around 29 dividend for FY10. In short, with good prospects ofSCM as compared to the world average of 363 SCM. growth, the stock is trading at levels where one canThere is clear room for growth even accounting for enter for a long term. In the coming years, thethe fact that gas may not be able to displace coal in increased availability of the gas and increasingthe power sector to the extent it may have in other pipeline infrastructure gives an assurance to the topdeveloped countries. In this scenario, gas line as well as bottom line. Another area to betransmission business plays a momentous role looked at is that the companys transmissionlinking the supply sources and the consumers both volumes will pick up in upcoming quarters as theindustrials and retail. Higher amount of availability supply sources would become very active when theof the resources (Gas) and the impressive growth in KG Basin’s production picks up. Beyond two yearsthe pipeline infrastructure in the state also shore up (FY12), the scenario is quite promising with thethe rationale to invest in the sector. Presently, gas interstate pipelines. When the pipelines becomeaccounts for 10% of total energy consumption in operational; it would be a turning point in theIndia, while the world average is 24%. Historically, company’s journey.there has always been a huge gas deficit in the In short, since the downside risk is, comparatively,country. However, with the estimated increase in gas low, even those who are risk averse in nature cansupply from new domestic discoveries and new LNG enter the stock with a one year to one and half yearcapacities, we estimate gas demand to increase perspective.substantially. Faster growth is estimated from CGD 12
  16. 16. December 29, COMPANY RESEARCH REPORT 2010 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 Equity13
  17. 17. December 29, COMPANY RESEARCH REPORT 2010 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 2.914
  18. 18. December 29, COMPANY RESEARCH REPORT 2010 Source: Ace Equity FINANCIALS GRAPH AND PEER GROUP COMPARISON Source: Multiple Sources Year EPS(UnitCompany Name Net Sales PBIDT PAT PBIDTM% PATM% ROCE% ROE% End Curr)Eastern Gases FY10 38.4 1.84 0.47 0.67 4.79 1.23 15.44 6.71GAIL India FY10 24996.4 5210.29 3139.8 24.75 20.53 12.37 27.15 19.89Mahanagar Gas FY10 639.4 262.92 147.01 16.45 37.37 20.89 34.32 23.41Ltd.Rel. NatRes FY10 270.02 167.08 69.87 0.43 61.88 25.88 5.34 3.96Guj. Petronet FY10 991.9 957.21 413.7 7.36 96.5 41.71 27.8 29.82 Source: Ace Equity15
  19. 19. December 29, COMPANY RESEARCH REPORT 2010 ANALYST NOTES AND COMPANY NEWSDecember 29, 2010Pipeline companies may be able tocharge a lower tariff rate thandetermined by the board. The Boardhas proposed amending the PNGRB(Determination of Natural Gas PipelineTariff) Regulations, 2008, and hasinvited comments from stakeholdersand experts. The issue came up in apre-bid conference for pipelines andsome bidders had wanted to know ifthey could offer a rate lower than whatwas determined by the Board. 16
  20. 20. December 29, COMPANY RESEARCH REPORT 2010Researched and prepared by: Muhammed Aslam E Fundamental Analyst Email: muhammedaslam.e@hedgeequities.com Ph: (0484) 3040400, 3040419 In co-operation with: Amar Chandramohan Sr. Fundamental Analyst Email: amar.c@hedgeequities.com Krishnan Thampi K Head of Research and Strategies Email: krishnanthampi.k@hedgeequities.comHEDGE RESEARCH & STRATEGIES GROUP DIRECT ALL RESEARCH QUERIES TO:Head of Research: Krishnan Thampi KSr. Fundamental Analyst: Amar Chandramohan Research & Strategies GroupJr. Fundamental Analyst: Muhammed Aslam E Hedge Equities LtdSr. Equity Technical Analyst: Anish Chandran C V 12 Floor, -Mini Muthoot Tech TowersSr. Commodity & Equity Technical Analyst: Kesavamoorthy B Kaloor, Kochi– 682017, Kerala, IndiaJr. Technical Analyst: James George Phone: (0484) 3040400Futures & Options Analyst: Yunus Ismail Email: research@HedgeEquities.comAccess all our research reports online at www.HedgeEquities.comDisclaimerThe information contained in our report does not constitute an offer to sell securities or the solicitation of an offer to buy, any security. This report is prepared forprivate circulation only. The information in our report is not intended as financial advice. Hedge Equities Ltd does not undertake the responsibility for anyinvestment decision taken by the readers based on this report. Moreover, none of the information in the research report is intended as a prospectus within themeaning of the applicable laws of any jurisdiction. The information and opinions contained in our research reports have been compiled or arrived at fromsources believed to be reliable in good faith, but no representation or warranty, express or implied, is made by Hedge Equities Ltd, to their accuracy. Moreover,you should be aware of the fact that investments in securities or other financial instruments involve risks. Past results do not guarantee future performance. 17

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