CMP Rs78, Target Rs92, Upside 17.1%
Tariff cut in line with expectations
PNGRB has cut the pipeline tariffs for GSPL by 12.5% which was in line with street expectations. The tariffs determined at Rs23.99/mmbtu are applicable with retrospective effect from November 2008 (like previous regulations) and are applicable for high pressure gas grid network of GSPL (90% of volumes). The major downward revisions in the tariff have been due to 1) PNGRB using the total provisional capacity of approved network i.e. 30.46mmscmd for tariff calculation (as against giving the benefit of gradual ramp up), 2) Considering the capital expenditure for only the approved pipelines (board recognized only 2,239Km of the total 2,890Km submitted for tariff determination). The tariff cut could lead to a one time impact of ~Rs2.5bn on the company (assuming 30.4mmscmd average volume from Nov-08 to June-12 and a tariff cut of 12.5%)
Disallowance of system use gas (SUG)
PNGRB has disallowed charging the customers/shippers for the system use gas (used for running heating system/compressors) which forms 0.3% of the total throughput. It has directed the company to refund the amount and it could lead to a one time payment of ~2.3bn (assuming 30.4mmscmd average volume for period Nov-08 to June-12 with a gas price of US$10/mmbtu).
Expect GSPL to challenge the points of contention
The regulatory body has assumed 100% of the provisional capacity for the tariff calculation and gradual ramp up has not been taken into account. In addition, the retrospective clause is expected to be a point of contention which could see GSPL challenging the order. However, we are not building in any such developments and we have streamlined our projections with the PNGRB order.
The order has helped in removing the regulatory overhang from the stock and now we could see the focus shifting to volume ramp up and the cross country pipeline projects. We assume volumes of 34mmscmd and 36mmscmd (38mmscmd earlier) for FY13E and FY14E respectively. We have lowered our tariff assumption from Rs0.9/scm to Rs0.85/scm (@9500 gross calorific value). Considering this, our EPS estimates have been lowered by 7.8% and 13.4% for FY13E and FY14E respectively. The stock now trades at attractive P/E multiple of 8.5x FY14E EPS. The current valuation seems to be factoring in a flat to low volume growth over a longer term. However, we believe gas supplies in the country would see robust growth over the longer term with commencement of production from new fields, CBM fields and new LNG terminals. Without building in any upsides from the cross country project we maintain our BUY rating with a revised 9-month target price of Rs92.