Gujarat State Petronet Ltd (Q4 FY14)

CMP Rs80, Target Rs95, Upside 18.8%

• Revenues at Rs2.3bn were lower than estimates owing to lower than expected realizations while volumes were better than estimates
• Volumes were at 20.8mmscmd for Q4 FY14 as compared to our estimates of 20.2mmscmd
• OPM at 86.8% was tad lower than our estimates of 87%, margins were down 427bps yoy due to operating deleverage
• Decrease in debt levels led to decline in interest expenses on a sequential basis
• We upgrade our rating to BUY from Market Performer as we expect the gas availability to increase in the country, GSPL will be a major beneficiary; we raise our target price to Rs95

Result table

(Rs m)	Q4 FY14	Q4 FY13	% yoy	Q3 FY14	% qoq
Qty processed (mmscmd)	20.8	22.2	(6.3)	20.7	0.4
Qty processed (mmscm)	1,869	1,994	(6.3)	1,861	0.4
Tariff (Rs/scm)	1.19	1.76	(32.3)	1.28	(7.1)
Net sales	2,314	3,598	(35.7)	2,439	(5.1)
Staff costs	(59)	(55)	6.9	(109)	(45.8)
Operations and maintenance	(160)	(177)	(9.8)	(203)	(21.3)
Other expenses	(87)	(89)	(2.9)	(69)	25.2
Operating profit	2,008	3,276	(38.7)	2,057	(2.4)
OPM (%)	86.8	91.1	(427) bps	84.4	243 bps
Depreciation	(449)	(480)	(6.4)	(462)	(2.8)
Interest	(319)	(315)	1.2	(353)	(9.5)
Other income	145	149	(2.6)	139	4.5
PBT	1,385	2,630	(47.3)	1,382	0.3
Tax	(471)	(1,015)	(53.6)	(520)	(9.5)
Effective tax rate (%)	34.0	38.6		37.7
Adjusted PAT	914	1,615	(43.4)	861	6.2
Adj. PAT margin (%)	39.5	44.9	(537) bps	35.3	419 bps
Ann. EPS (Rs)	6.5	11.5	(43.4)	6.1	6.2

Source: Company, India Infoline Research

Revenues lower than expectations owing to weak tariffs
During Q4 FY14, GSPL reported revenues of Rs2.3bn a fall of 35.7% yoy and 5.1% qoq. Sales were lower than our estimate of Rs2.5bn. Volumes were at 20.8mmscmd compared to our estimates of 20.2mmscmd. Volumes fell 6.3% yoy but improved 0.4% qoq. Sequential recovery in volumes was owing to increase in production at KG-D6 field of Reliance Industries. Tariffs were at Rs1.2/scm a fall of 32.3% yoy and 7.1% qoq. We had built in a tariff of Rs1.29/scm for the quarter. The company has delayed implementation of tariff hikes as some approvals are pending at the zonal level.
Cost analysis

As a % of net sales	Q4 FY14	Q4 FY13	bps yoy	Q3 FY14	bps qoq
Staff costs	2.6	1.5	102	4.5	(191)
Operations and maintenance	6.9	4.9	198	8.3	(142)
Administrative expenses	3.8	2.5	127	2.8	91
Total costs	86.8	91.1	(427)	84.4	243

Source: Company, India Infoline Research

Operating margins tad below estimates
For Q4 FY14, GSPL reported OPM of 86.8% compared to our estimates of 87%. OPM was down 427bps yoy but improved 243bps qoq. The key reason for the fall was impact of operating deleverage as volumes were lower by 6.3% yoy. All expenses were higher on a yoy basis. Sequentially though the performance was better with 243bps improvement in OPM. While staff costs declined 45.8% qoq, operations & maintenance expenses were lower by 21.3% qoq.

Lower than expected interest and depreciation supports performance at PAT level
Operating profit at Rs2bn was lower than our estimates by 7.6%. However, PAT at Rs914mn was lower than our estimates by only 1.9%. The improved performance at the PAT level was on the back of 11.4% lower than projected interest costs and 7.4% lower than estimated depreciation. This was primarily due to lower than estimated capitalization. 370bps sequential fall in tax rate added to the performance. PAT was lower by 43.4% yoy but saw an increase of 6.2% qoq.

Upgrade to BUY
We upgrade our rating from Market Performer to BUY and revise our target price to Rs95. We are turning positive on the stock as we believe the worst in terms of volume performance is behind us. KG-D6 production has seen some improvement in Q4 FY14 and is expected to gradually increase over the next couple of years. Furthermore, GSPC has tied up spot volumes at Petronet LNG’s Dahej Terminal which will lead to incremental LNG availability in Gujarat. Over the next couple of years volumes should commence from the three cross country pipelines as well.

Financial summary

Y/e 31 Mar (Rs m)	FY13	FY14	FY15E	FY16E
Revenues	11,732	10,507	11,366	12,787
yoy growth (%)	4.4	(10.4)	8.2	12.5
Operating profit	10,720	9,288	10,468	11,777
OPM (%)	91.4	88.4	92.1	92.1
Pre-exceptional PAT	5,381	4,191	5,130	5,889
Reported PAT	5,381	4,191	5,130	5,889
yoy growth (%)	3.1	(22.1)	22.4	14.8
EPS (Rs)	9.6	7.4	9.1	10.5
P/E (x)	8.4	10.7	8.8	7.6
Price/Book (x)	1.5	1.4	1.2	1.1
EV/EBITDA (x)	4.7	5.5	4.9	4.2
Debt/Equity (x)	0.5	0.3	0.3	0.2
RoE	19.9	13.4	14.6	14.7