CMP (NSE) 15:57, 21 Sep
Oil & Gas
Last updated on
26 Jul, 2021
Government initiatives to boost Gas transmission: The Indian Power system for planning and operational purposes is divided into five regional grids. One Nation, One Gas Grid refers to the integration of these regional grids, thus establishing a National Grid for providing energy produced by natural gas to various stakeholders. The Government of India has set the energy roadmap, envisaging more than double the share of cleaner natural gas in the consumption basket, diversifying sources of energy, connecting the nation with one gas pipeline grid and bringing affordable fuel to people and industry. This initiative of the Indian government will help meet its target of reaching 15% natural gas in its energy basket mix by 2030, which is currently at 6.2-6.5% whereas the global average is 23-24%. This will directly benefit GSPL which is a Gas transmission company.
Outlook and valuation
We forecast GSPL’s consolidated PAT to grow at 25% p.a. through FY23ii driven by ramp up in transmission volumes, impressive performance of Gujarat Gas (54% holding) and an assumption of unchanged pipeline tariff. GSPL has plans to invest Rs30bn in the next 3 years to grow its pipeline connectivity in Gujarat; this would be scrutinized by the PNGRB while resetting its tariff. A 10% lower tariff implies 12% change to FY22/23 EPS.
GSPL trades at 8x FY23ii consolidated earnings, which we think is cheap. The base case SoTP takes into consideration the following (1) 7x FY23 PAT for its regulated pipeline businesses (in sync with regulated power utilities), (2) 50% discount to value its holdings in Gujarat Gas at CMP, and (3) 20x FY23ii PAT for Sabarmati Gas (27% stake). While overhang of tariff reset would continue for some time, we think GSPL offers a low-risk annuity play on gas penetration in Gujarat and a proxy play on fast growing CGD operations of Gujarat Gas. The base case SoTP target is Rs394/share and we believe the stock is undervalued at the CMP.