Gspl initiating coverage

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

2010

BUSINESS SUMMARY

Gujarat State Petronet Ltd (GSPL), a GSPC group

company, is a pioneer in developing energy

transportation infrastructure and connecting

natural gas supply basins and LNG terminals to

growing markets. It is the only company in India to

transmit natural gas for its clients without trading

in it.

INVESTMENT RATIONALE / RISKS

As the world’s second largest growing economy in the world, India’s need for energy is huge. Overall macroeconomic conditions in the economy will set the demand for energy and the growth of energy demand. India has been enjoying higher growth rates since the early 1990s because of economic reforms. This growth will contribute to greater demand for energy. The robust growth outlook for the Indian economy and the resultant increase in the end - user consumption of the natural gas is expected to drive the natural gas market in the future. In this scenario, gas transmission business plays a momentous role linking the supply sources and the consumers both industrials and retail.

Talking about the GSPL, it is the second largest gas transporter in the country, concentrating in Gujarat: India’s most industrialized state. The current grid operations of GSPL account for 1,666 km in the state and another 1100km pipeline is underway. What makes GSPL a good bet is that it had made a bid for four interstate projects (Total length: 5724 Km) with which its network will get quadrupled and the financial are expected to have substantial growth.

Meanwhile, GSPL’s growth plans would be impacted if the company faces regulatory delays in authorization for installing new pipelines. Any delay in execution and construction of new pipelines would also impact the profitability of GSPL.

(In Crores) FY09 FY10 FY11E FY12E

SALES 487.50 991.97 1030.09 1111.43

PAT 123.41 413.77 453.90 502.47

EPS 2.19 7.36 8.07 8.93

PE 53.26 15.88 14.48 13.08

Source: Multiple Sources

Sector: Gas Transmission EPS (TTM): Rs.7.46 PE (TTM): 15.56 Industry PE: 18.88 Mkt. Cap: 6531.42 52 Wk high: Rs.128.25 52 Wk low: Rs.82 P/BV: 4.18 Beta: 0.90 Yield (%): 0.86 Face Value: 10.00 Debt/Equity: 0.86 Institutional Holding: 12.28%

NSE Code: GSPL

BSE Code: 532702

ISIN Code: INE7246F01010

Reuters Code: GSPT.BO

Bloomberg Code: GUJS IN

Website:

www.gujaratpetro.com

COMPANY RESEARCH REPORT December 29, 2010

Contents

BRIEF PROFILE .............................................................................................................................................................................. 1

COMPANY ADDRESS................................................................................................................................................................. 1

TOP MANAGEMENT ................................................................................................................................................................. 1

BUSINESS ...................................................................................................................................................................................... 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 ............................................................................................................................................... 6

SECTOR ......................................................................................................................................................................................... 6

OUTLOOK AND SCOPE .................................................................................................................................................................. 8

FINANCIALS AND VALUATIONS .................................................................................................................................................... 9

HISTORICAL FINANCIALS .......................................................................................................................................................... 9

FINANCIAL OUTLOOK ............................................................................................................................................................. 10

RISKS ........................................................................................................................................................................................... 11

INVESTMENT RATIONALE ........................................................................................................................................................... 11

FINANCIAL HIGHLIGHTS ............................................................................................................................................................. 13

FINANCIAL RATIOS ..................................................................................................................................................................... 14

FINANCIALS GRAPH AND PEER GROUP COMPARISON .............................................................................................................. 15

ANALYST NOTES AND COMPANY NEWS .................................................................................................................................... 16


1

BRIEF PROFILE

Gujarat State Petronet Ltd (GSPL), a GSPC group

company, is a pioneer in developing energy

transportation infrastructure and connecting natural

gas supply basins and LNG terminals to growing

markets. It is the only company in India to transmit

natural gas for its clients without trading in it.

Gujarat State Petronet Limited was set up to

complement the efforts of GSPC . It has taken

initiative in developing energy transportation

infrastructure in Gujarat and connecting major

natural gas supply sources and demand markets.

GSPC recognized Gujarat’s concern for infrastructure

development in order to support the future

hydrocarbon economy and industry. The company

incorporated Gujarat State Petronet to develop a

high-pressure pipeline network for natural gas

transportation in Gujarat. The company has received

ISO 9001: 2000 certification for operation and

maintenance. GSPL is the only natural gas

transmission company in India that operates on

‘open access’ basis, i.e. it transports gas on behalf of

third party shippers in return for a transport fee.

GSPL’s existing gas transmission network comprises

1,666 km of medium to high pressure pipelines

connecting natural gas supply points at Hazira and

Dahej to consumption points covering the districts of

Ahmedabad, Anand, Baroda, Bharuch, Gandhinagar

and Surat. The majority of GSPL’s customers are

power, fertilizer, chemical and steel plants that

purchase natural gas directly from suppliers, as well

as several local city gas distribution companies who

supply natural gas to retail consumers.

COMPANY ADDRESS

GSPL, GSPC Bhavan,

5th

Floor, Behind Udyog Bhavan,

Sector 11, Gandhi Nagar- 382011

TOP MANAGEMENT

1. Chairman – A K Joti

2. Managing Director – Tapan Ray

3. Non Executive Director - D J Pandian

4. Non Executive Director- Athanu

Chakrabarthy

5. Independent Director – Suresh Mathur

6. Independent Director –R. Vaidyanathan

7. Independent Director – J K Jain

8. Company Secretary – Reena Desai


2

BUSINESS

GSPL's primary operation is to connect various

supply sources and users of natural gas in Gujarat

through gas pipeline network. It is the only pipeline

infrastructure company operating on an open access

basis. Currently, GSPL operates a medium-to-high

pressure gas transmission grid comprising

approximately 1666 km of natural gas pipeline.

While GSPC harnesses and procures natural gas,

GSPL is building the infrastructure that transmits the

gas across the state of Gujarat and ultimately allows

last-mile linkage to the end-user. GSPL is

continuously expanding its pipeline network in

Gujarat to reach the demand centers by laying gas

pipeline network. The company has signed gas

transmission agreements (GTAs) with various

industries for the supply of natural gas. The

company has developed requisite expertise and

confidence with proven project management

competencies. The gas grid is equipped with the

latest bi-directional gas transmission technology to

enable two-way gas flow. This introduces a lot of

flexibility into transmission by allowing gas to be

sourced or uploaded at either end of the pipeline

network. Another innovation is in the open access or

contract carrier principle of transmission. This allows

any gas transmission company to approach GSPL for

permission to use the network on payment of the

required charges. Thus, private sector participation

in gas transmission is encouraged, which makes

more volumes available for consumers. GSPL has

already put in place a pipeline network of about

1666 km and has been expanding its network and

expects to complete the construction of approx.

1100 kilometers of pipelines during the next 2 - 3

years. Further, the Company also continues to

develop several other spur lines to connect

remaining industrial clusters and medium size

customers along the pipeline network in Gujarat.

GSPL sources its gas either from the gas fields of

GSPC and other companies, or from Liquefied

Natural Gas (LNG) terminals at Shell’s Hazira,

Petronet’s Dahej, Reliance’s KG basin. GSPL has a

mixture of long-

term as well as

interruptible

gas

transmission

contracts with

its customers.

The Gas

Transmission

Agreements

(GTAs) that GSPL enters into with its customers

designate the entry and exit points for the natural

gas as it travels through its gas transmission network

and provide for terms such as tariff, tenure and

capacity reserved in its network. Tariff primarily

consists of capacity charges, which are fixed fees for

the reservation of capacity and typically cover 90%

of the customer’s tariff commitment and commodity

charges which are linked to the actual transportation

of natural gas through its gas transmission network.

GSPL’s GTAs include ‘ship or pay’ provisions which

require its customers to pay the capacity charge for

the capacity reserved by them regardless of the

actual volume of natural gas they transport. This

provides a strong visibility and sustainability to its

revenues.

PIPELINES

GSPL’s is the second largest gas transmission

network in India. GSPL’s pipelines are connected to

the major gas supply sources in Gujarat including

It is the only pipeline

infrastructure company

operating on an open access

basis. Currently, GSPL operates

a medium-to-high pressure gas

transmission grid comprising

approximately 1666 km of

natural gas pipeline.


3

designated collection points near the natural gas

fields of Cairn Energy, GSPC and GSPC Niko, all

located in Hazira, Shell’s Hazira, Petronet’s Dahej,

Reliance’s D6 field of KG basin. GSPL has a

transmission capacity of 50 mmscmd and transmits

36.7 mmscmd of gas of which over 64% is sourced

from RIL KG D 6, 25% from Petronet LNG and rest

from GSPC, Cairn India and PMT. The company has

1666 kms of gas pipeline in operation from Hazira –

Vadodra - Ahmedabad - Kalol – Himmatnagar-

Mehsana- Rajkot- Morbi- Anjar-Jamnagar. The gas

grid of the Company has reached to 16 of 26 districts

in Gujarat. The Company is currently expanding its

network and expects to complete the construction of

approximate 1100 kilometers of pipelines during the

next 2 – 3 years. GSPL’s pipeline network, currently,

lies in the Gujarat state only.

Major Pipelines in Operation Year

Commissioned Pipeline Length

(In Km) 2000-01 Hazira - Mora 14 2001-02 Amboli - Dahej 45 2002-03 Mora - Utran 25

Bhadhut - Paguthan 26 2003-04 Paguthan - Baroda 64 2004-05 Baroda - Ahmedabad -

Kalol 143

Mora - Sajod 58 Kalol - Santej 15

2006-07 Mora - Vapi 138 Anand - Rajkot 294 Kalol - Mehsana 47 Kalol - Himmatnagar 63

2007-08 Padamla - Halol 37 2008-09 Rajkot - Jamnagar 110 2009-10 Olpad- Utran 17 2010-11 Gana-Hadala 85

Morbi- Mundra 130 Source: Company

SPUR LINES

GSPL has special

pipelines meant

for industrial

clusters and

medium and big

sized industrial

customers. These

kinds of lines

constitute a

notable part of

the total

network. Since Gujarat is a huge gas supply sources,

it has a good proximity to the industrial centers in

the state. Spur lines have been impressively grown

on the back of high paced industrialization in the

state. The present spur lines have been connecting

the industrial houses like Essar Steel, Torrent Power,

Raymonds, Welspun and Alok Industries, GNFC,

Videocon, Khribco, Utran, GACL, GFL, GSECL

Dhuvaran, Sumangalam Glass, Ajanta

Manufacturing, Euro Ceramics, Metrade etc… The

Company also continues to develop several spur

lines to connect remaining industrial clusters and

medium size customers along the pipeline network

in Gujarat like Hindustan Glass, Birla Copper, Tata

Motors Nano plant etc…

Gujarat Gas Grid

GSPL is now implementing a Gas Grid Project in the

state of Gujarat, which envisages transporting

indigenous natural gas from production centers and

LNG from terminals to demand centers all over

Gujarat through a high pressure trunk pipeline. It is a

pipeline transmission project to deliver gas to end

The Company is currently

expanding its network and

expects to complete the

construction of approximate

1100 kilometers of pipelines

during the next 2 – 3 years.

GSPL’s pipeline network,

currently, lies in the Gujarat

state only.


4

users and for local distribution. Under this, the

following pipelines have been proposed:

Bharuch‐Jamnagar (300Kms)

Dahod‐Pipavav (250 Kms)

Baroda‐Halol (60 Kms)

Morbi‐Mundra (250 Kms)

Under this, GSPL is setting up a 2,500km pipeline for

gas transportation. It already has a 1,666 km pipeline

network in place. It is executing this pipeline

network expansion project in two phases. Phase‐I

involves investment of INR12bn and covers a

distance of 525km from Vadnagar, in north Gujarat,

to Vapi, in the south of the state. Phase‐II involves

extending the network to Saurashtra,

Surendranagar, Rajkot and Jamnagar. The length of

this segment is 600km and involves an investment of

INR20bn.

Expanding Outside Gujarat: National Grid

It has been the biggest factor for the company that it

has won the bid for the two cross country pipelines

namely Mallavaram-Bhilwara (1,600 KM), Mehsana-

Bhatinda (1,670 km) and become the most

competitive bidder for the Bhatinda-Jammu-Srinagar

(740 km).

With this, the

company is

extending its

reach outside

Gujarat. The

total length of

these

pipelines

would be

6,420km. This

is in a consortium with IOC, HPCL and BPCL. In the

consortium, the GSPL’s share is 52% while IOC has

26% and HPCL and BPCL have 11% each. At present,

GSPL has its gas grid network only within Gujarat

and for first time it is stepping outside state. PNGRB

is expected to soon issue the Letter of Authorization

(LOA) to the GSPL-led consortium. The pipelines are

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 network

covering approximately 1/3rd of the country's

geography enabling flow of gas from multiple gas

sources to principal demand centres. These pipelines

are expected to receive the gas from the sources like

Petronet LNG’s Dahej, Shell’s Hazira, GSPC Mundra

GSPL led consortium has won

the bid for the two cross country

pipelines namely Mallavaram-

Bhilwara (1,600 KM), Mehsana-

Bhatinda (1,670 km) and become

the most competitive bidder for

the Bhatinda-Jammu-Srinagar

(740 km). With this, the

company is extending its reach

outside Gujarat.


5

terminal and GSPC’s and RIL’s discovery in the KG

Gas basin.

GSPL has also established a comprehensive

operations and maintenance procedure to monitor

and maintain the health of its gas grid. This

procedure includes 24 hour supervision of the entire

pipeline through a SCADA system, monthly and

quarterly field inspections of the pipeline and yearly

patrolling of the entire length of the pipeline to

monitor soil erosion, possible encroachments and

detection of pipeline leakage.

Presence in City Gas Distribution through

Associates

The company has a strong presence in City gas

distribution services too. It has a stake in two city

gas distribution companies: GSPC Gas Co. Ltd. and

Sabarmati Gas Ltd. Sabarmati Gas, a JV between

BPCL and GSPC, was incorporated in Jun 2006 to set

up the CGD project in Mehsana, Gandhinagar and

Himmatnagar. Besides GSPL’s 36.51% stake in GSPC

Gas, GSPC holds 62% stake and GUJS’s seven largest

gas consumers hold the remaining stake. The stake

of GSPL in the Sabarmati gas has been 13.75%.

GSPL GAS GRID

MAP

Source: Company


6

Entering Wind Energy Business

GSPL has entered the energy sector too. From FY10,

It has begun to sell it out to third parties. A total of

52.5 MW wind power project in the areas of Maliya

Miyana, Rajkot and Gorsar, Porbandar is in progress

out of which 6MW has already been completed in

the FY10 itself. The project is expected to complete

the by FY12.

SECTOR

In 2009, India was the world’s fourth largest

consumer of energy, behind the United States,

China, and Russia. As per a Report by CRISIL Risk &

Infrastructure Solutions Limited, named Indian Gas

Market Assessment, February 2010 (“CRISIL Report”)

India‘s consumption of energy, on a per capita basis,

was one of the lowest in the world in 2009. Over the

past few years, demand for energy has risen in India

along with India‘s economic growth. Gas is currently

a minor fuel in the overall energy mix in India.

However, gas consumption is expected to grow at

4.2% per year on an average from 2006 to 2030.

(Source: Energy Information Administration,

International Energy Outlook 2009). The main factors

for increase in gas consumption are expected to be

macroeconomic conditions and policies, the price

and availability of alternative fuels, the expansion of

gas related infrastructure, the development of

policies in respect of carbon emissions, the

identification of new uses of gas, programmes for

the implementation of city gas distribution networks

and the fast evolving regulatory environment. It is

expected that natural gas will continue to play a

predominant role in sectors like power generation,

fertilizer, CNG & PNG distribution, refineries and

commercial segments and virtually in all the

industrial sectors. Overall demand in India for gas is

projected to increase from 209.6 mmscmd in the

financial year 2010 to 343.5 mmscmd in the financial

year 2015 and 464.4 mmscmd in the financial year

2023 (Source: CRISIL Report). In fact many other

reports indicate such growth potential for India’s gas

market. Currently, Gujarat alone accounts for

approximately 40% of the gas demand in the

Country. Demand for gas in Gujarat is projected to

grow from 85.4 mmscmd in the financial year 2010

to 122.0 mmscmd in the financial year 2015 (Source:

CRISIL Report). In Gujarat, many industries are

switching over to gas for their fuel and feedstock

requirements. The expansion of the gas grid into

new markets has resulted in substantial conversion

from alternate liquid fuels to gas as well as increase

in the demand for gas through expansion of

capacities of existing projects, setting up of new

industries and development of City Gas Distribution

networks in Gujarat. With the commencement of

new discoveries in the eastern coast of India, the

demand from new regions is expected to increase.

Domestic gas production is projected to increase

from 177 mmscmd in 2010 to 227 mmscmd in 2023

(Source: CRISIL Report). This increase in production is

expected to arise from announced or new

discoveries of gas reserves, adding production to

existing fields. Domestic production may also be

supplemented in the future from LNG imports,

production from coal bed methane fields, shale gas

etc. (Source: CRISIL, Report) In fact, even in 2009-10,

the actual supply and consumption of gas could have

been higher but for the capacity constraints in the

existing trunk pipelines.


7

Presently, the total trunk pipeline

network is 11,070 km

Here, Transmission pipelines are the most vital

segment, as they connect supply sources with

demand regions. Companies which own transmission

pipelines, sign Gas Transmission Agreement with

E&P companies, LNG Terminals, marketing

companies and other major end-users to provide

access to their pipeline network. Transmission

companies are immune from the fluctuation in gas

prices as they do not purchase the gas but merely

transport the gas. The gas supply is governed by Gas

Sales Agreements between sellers and buyers.

Profitability of transmission companies is governed

by transmission tariff and capacity utilization of its

network. Presently the total trunk pipeline network

is 11,070 km. The pipelines are owned and operated

by central and state public sector undertaking, and

also private companies.

The increased clarity over

future supply volumes, to

certain extent, removed

uncertainties lingering over

sustainable and uninterrupted gas supply and

resulted in increased participation from private

companies. Reliance Gas Transportation

Infrastructure Limited (RGTIL) constructed a 1,385

km long East-West pipeline (EWPL), country’s second

longest gas pipeline after GAIL’s Hazira-Vijaipur-

Jagdishpur (HVJ), to evacuate natural gas produced

from Reliance Industries Limited’s Krishna Godavari

(KG) basin. After commissioning of the EWPL, India’s

current gas transmission network stands at 11,394

km (GAIL – 6,986 km, GSPL – 1,666 km, RGTIL – 1,385

km, others – 1,357 km) with capacity of 273.8

mmscmd. . The gas pipeline network is spread across

Gujarat, Maharashtra, Rajasthan, Madhya Pradesh,

Uttar Pradesh, Delhi, Haryana, Andhra Pradesh,

Tamil Nadu, Tripura and Assam. Among other

regional pipelines, Assam Gas Company has a

prominent pipeline network in north‐east India. In

addition to its 250km pipeline linking Sibsagar to

Margherita, Assam; it has over 350km of branch

pipelines in the region. But this network is

insufficient to meet the increased supply and

demand. To link the both, Gas transmission has to

develop faster than earlier. It may be noted that the

current capacity exceeds the gas supplies of 115.5

mmscmd, but does not indicate adequacy of current

infrastructure, as (a) the HVJ-Dahej- Vijaipur pipeline

(DVPL) network, main supply trunk-line to northern

region, has already been operating at full capacity

and cannot take any additional gas requirement (b)

technically, capacities of gas transmission network

along with its spur lines, when expressed in

volumetric terms, are not

additive and would result in

double counting. A number of

gas discoveries have been made

in the Eastern region, while

historic industrial development has been in the

West. The distance between demand and supply

centers is bound to be a hindrance, if the gas

network is not developed properly. With the existing

LNG terminals at Dahej and Hazira, besides the

upcoming ones at Kochi, Dabhol, Mangalore and

Ennore, there is an urgent need to develop the

transmission lines connecting different states. While

the local distribution system may be developed over

time, along with demand growth, the transmission

system needs to be developed to enable various gas

producers and LNG importers to reach the market.


8

OUTLOOK AND SCOPE

The outlook for gas is very promising with the

demand from various industrial sectors looking

spectacular. Gas demand’s growth in the past was

mainly on the back of the demand from industries

like Power and fertilizers, which are likely to

continue dominating natural gas demand in the

coming years too. A number of power projects such

as Torrent Power’s (TPW) plant at Sugen, National

Thermal Power Corporation’s (NATP) plants at

Kawas and Gandhar in Gujarat and Reliance Power’s

(RPWR) plant at Dadri, Uttar Pradesh, are likely to be

commissioned in the next three to four years. Thus,

gas demand from the power sector is likely to

increase in a big way. Besides that, a large number of

fertilizer plants still operate on fuel oil and naphtha.

Fertilizer plants such as Gujarat Narmada Valley

Fertilizers (GNFC IN, NR) at Bharuch, Indian Farmers

Fertilizer Cooperative’s (IFFCO) plant at Kalol and

Gujarat State Fertilizers and Chemicals’ (GSFC) plant

at Baroda are still getting lower than requirements.

Thus, gas demand in the fertilizer sector is also likely

to be driven by higher demand from gas‐based

plants and plants that are looking to convert their

feedstock. To take advantage of all these, GSPL is

expanding its network in Gujarat to 2,500 km as a

part of Gujarat grid and has won bid for setting up

cross country pipelines of 6,420km, which is the

company’s first stepping up outside the state.

Gujarat State Petronet Ltd (GSPL) will be one of the

major beneficiaries of increased gas availability in

India. GSPL’s extensive gas transmission network

and additional expansion of its pipeline network in

the next two years will contribute significantly to the

volume growth. Further, more than one-third of the

production from D6 gas fields of RIL’s field in KG

Basin coming in to Gujarat is transported through

GSPL’s pipeline

network. The

company has

signed long

term contracts

with various

customers

across several

sectors, for

transmission of

gas from RIL KG Basin fields. Further, the Company is

developing several other spur lines to connect

remaining industrial clusters and medium size

customers along the pipeline network in Gujarat.

Besides, the emergence of new supply regions and

sources necessitates the development of a national

interconnected pipeline network. As a part of that,

GSPL planned to set up pan–India pipelines, to take

advantage of the significant increase in supply

volumes.

With those, its total network will cross 5600km.

Moreover, the Company holds significant equity

interest in City gas distribution (CGD) companies,

Interstate Pipelines for which

GSPL led consortium has bid

and become most competitive

bidder

Length

(In Km)

Mallarvaram (Andhra Pradesh) –

Bhilwara (Rajasthan) (formally won

the bid)

1600

Mehsana(Gujrath)- Bhatinda (Punjab) 1670

Bhatinda - Jammu 740

GSPL holds 13.75% in Sabarmati

Gas Ltd. and 36.51% in GSPC Gas

Co. Ltd. It is noteworthy to

mention that Sabarmati Gas Ltd.

(0.7 mmscmd) and GSPC Gas Co.

Ltd. (3.0 mmscmd) together are

among the largest CGDs in the

Country.


9

which have natural synergy with gas transmission

business. GSPL holds 13.75% in Sabarmati Gas Ltd.

and 36.51% in GSPC Gas Co. Ltd. It is noteworthy to

mention that Sabarmati Gas Ltd. (0.7 mmscmd) and

GSPC Gas Co. Ltd. (3.0 mmscmd) together are among

the largest CGDs in the Country. It is expected that

with the expansion of gas transmission pipelines and

CGD infrastructure, these CGD companies would also

continue to grow, going forward. The company also

has connectivity to all major natural gas sources in

Gujarat.

GSPL’s ability to cater to demand centres and

increase in domestic supplies of gas from Petronet

LNG and Reliance KG D6 basin will drive gas

transmission volumes at a faster space in the coming

years. GSPL’s gas transmission volume has jumped

from 14.9 mmscmd in FY09 to 36 mmscmd in FY10.

We believe GSPL will be one of the prime

beneficiaries of increased gas availability in India.

The commencement of gas production from the

Reliance KG-D6 field will be the key growth driver for

the company over the some years. The gas

transmission volume from Reliance was 10.7

mmscmd in FY10 and likely to be 14.8 mmscmd in

FY11E. The additional gas supply from the new

Petronet LNG capacity of 5 MTPA and higher

capacity utilization of Shell’s LNG terminal will also

contribute to the volume growth for GSPL in the next

two years. Over the past year, gas stocks have

outperformed the Sensex by 25%; the

outperformance is likely to continue for the next

year. Transmission and distribution businesses have

network exclusivity for 25 years and marketing

exclusivity for 5 years as gas infrastructure is yet to

be developed in India. We believe this exclusivity

clause is likely to help pipeline and CGD companies

report robust RoEs and RoCEs for the next four to

five years.

FINANCIALS AND VALUATIONS

HISTORICAL FINANCIALS

The historical financials gives a good picture of the

company’s well paced journey. Both the top line and

bottom line have grown in a greater momentum

with the former grew at CAGR of 46.18% during FY07

and FY10 and the latter jumped at 66% during the

period. It was the FY10 during which the figures, be

it top line or

bottom line,

got doubled

increasing at

three digit

rate. . It is

noteworthy

that the total

operating

expenditure to

sales ratio was

a mere 6%. As

a Capex

oriented business, depreciation has been the big

daddy in the expenditure book. For the FY10,

depreciation was 23% as percentage of sales. The

margins, too, are dazzling with the EBIDTA and PAT

reads at 96% and 41% respectively in the FY10. As

usual, what makes the difference in the EBTDA and

PAT are mainly Tax and depreciation followed by the

interest expense. The company has been keeping the

tax rate at an average of 34%. GSPL also provides

more than 23% of the sales for the depreciation,

which is by depreciating its pipeline assets at an

average of 8%. As the indicator of increase in the

GSPL’s Income from

Transportation of gas, which is

the primary operation of the

company, reached Rs. 991.95

crore, recording an increase of

103% over last year’s figure of

Rs. 487.50 crore. Meanwhile the

bottom line was Rs. 413.77 crore

compared to Rs. 123.41 crores in

the previous year, recording an

increase of 235.28%.


10

operating efficiency, the operating expenditure grew

at a CAGR of mere 7.7% only during the FY07-FY10.

To be worthwhile, the Gross Block of Assets has also

increased from Rs. 2421.18 crores to Rs. 3325.49

crores and consequently there has been an increase

in Depreciation from Rs. 170.49 crores to Rs. 236.49

crores. Talking about the profitability figures, as

already mentioned, its profitability ratios stood

outstanding with

an EBITDA margin

of 96% and PAT

was at 41%. The

performance

ratios like ROE

and ROCE have

also shot up in the

FY10 in tandem

with the jump in

the company’s

performance,

with the same lies

at 30% and 28%

respectively. It is

also worth

mentioned that

its wind energy

division has also

started contribute

the top line in the

last fiscal. These

are better among the peers. With the forte of the

kind of business, GSPL’s debt equity ratio was at 0.86

times. Meanwhile it has been maintaining dazzling

interest coverage ratio (7.68 times). As a sign of

growing business, GSPL has been retaining 86%

(Payout ratio: 14%) of the earnings with it and had

paid 10% dividend for FY10. From a valuation

perspective, GSPL is trading at 15.88 times of its FY10

earnings, which doesn’t seem to be expensive while

that of the gas distribution industry stands at 18.8

times. Because of the jump in the overall financials

of the company in the FY10, the EPS had shot up and

the valuation has also become quite impressive.

FINANCIAL OUTLOOK

Looking forward, the revenues are expected to step

up 3.8% and 8% for the FY11 and FY12 respectively

on a year on year basis i.e. at a CAGR of 5.8%.

Meanwhile beyond the FY12, the prospect looks to

be spectacular when the cross country pipelines get

commissioned. The opportunities are eternal in the

proposed pipelines but these will take at least 36

months to commission. Since good figures have been

reported in the last fiscal, we cannot see the same

paced momentum in the next two years. There are

no such major pipelines, expected to be operational

within 2 years, under execution. The prospect the

other operating income (Sale of electricity) for the

next fiscal is expected at 11.73 crore and is likely to

register 358% for the FY12 as the current ongoing

energy projects are expected to be operational by

then.

The bottom line, too, are expected to grow at 9.7%

and 10.7% respectively (YoY) for the period. For the

next two years, it would be the employee cost and

other manufacturing expenses to occupy major

space in the expenditure book as the proposed

bigger projects will get started. We don’t expect any

major changes in other operating expenditure

components like power and fuel cost, General and

administration expenses, selling and distribution and

miscellaneous expenses, which likely to grow only as

FINANCIAL OUTLOOK

The top line is expected to

grow at a CAGR of 6% from

FY10 to FY12.

The bottom line is expected

to grow at a CAGR of 10.2%

from FY10 to FY12.

Depreciation as a proportion

of sales which stood at 23%

For FY10 is expected to

remain at that level the next

2 years.

Other manufacturing

expenses as a % of sales is

likely to average around 3%

for the next 2 years.

The FY12 EPS is forecasted

to reach Rs. 8.93


11

in the past. With the growth in the bottom line, the

PAT margin is expected to reach 45% in the FY12.

Talking about depreciation, the company has been

depreciating the pipelines in 12 years (around 8%) as

against the actual economic life period of 30 years.

So for the initial years, the bottom line won’t reflect

the actual earnings. Meanwhile, the benefit of this

can be reaped after some years.

With the growth in the forecasted earnings (9.7%

and 10.7% in the FY11 and FY12 respectively), the

forward PEs looked to be decreasing trend with the

same for the period works out to 14.48 and 12.92

respectively. In the coming years, the increased

availability of the gas and increasing pipeline

infrastructure gives an assurance to the top line as

well as bottom line.

RISKS

Gas Supply Risk: GSPL’s profitability and valuations

may be negatively impacted on lower than expected

gas supply volumes. Currently, natural gas has better

economics against alternative fuels like naphtha and

fuel oil. However, any competitiveness of alternative

fuels vis-à-vis natural gas would impact the volumes

of GSPL. The sourcing of gas from the producers has

also a chance of being impacted. Delay in

authorization and construction of new pipelines:

GSPL’s growth plans would be impacted if the

company faces regulatory delays in authorization for

installing new pipelines. Any delay in execution and

construction of new pipelines would also impact the

profitability of GSPL. Regulatory risk: Petroleum and

Natural Gas Regulatory Board (PNGRB) has been set

up for the determination of transmission tariffs and

authorization of gas transportation pipelines. If

GSPL’s transmission tariffs are lower than expected,

this will have an impact on the financial performance

of the company. Recently, there is a move from the

government side to make the tariff cheaper which is

likely to push up the volumes with low margins. As

of now, the tariff is under the full control of PNGRB

(Petroleum and Natural Gas Regulatory Board).

GSPL’s failure

to comply

with

prescribed

technical

parameters

may also

result in a

heavy fine and

the company

coming under

the scanner of

the regulator.

Proposed

Social Tax (Gujarat government CSR at 30%): The

Gujarat government has proposed 30% CSR on pre-

tax profits on state-owned companies. GSPL’s

contribution towards Gujarat Socio-Economic

Development Society will have an impact on the

earnings and valuations of the company.

INVESTMENT RATIONALE

As the world’s second largest growing economy in

the world, India’s need for energy is huge. The role

of industry in the growth of economy can never be

ignored. The role of energy lies there to support the

industry whether it be manufacturing or else. In

2009, India was the world’s fourth largest consumer

of energy, behind the United States, China, and

Russia. Overall macroeconomic conditions in the

economy will set the demand for energy and the

growth of energy demand. India has been enjoying

RISKS

Gas Supply Risk

Delay in authorization

and construction of new

pipelines

Regulatory risk

Proposed Social Tax

(Gujarat government

CSR at 30%)


12

higher growth rates since the early 1990s because of

economic reforms. This growth will contribute to

greater demand for energy. The robust growth

outlook for the Indian economy and the resultant

increase in the end–user consumption of the natural

gas is expected to drive the natural gas market in the

future. The main factors for increase in gas

consumption are expected to be macroeconomic

conditions and policies, the price and availability of

alternative fuels, the expansion of gas related

infrastructure, the development of policies in respect

of carbon emissions, the identification of new uses

of gas, programmes for the implementation of city

gas distribution networks and the fast evolving

regulatory environment. Gujarat by far is the most

developed gas market in the country. Currently,

Gujarat accounts for approximately 32% gas

consumption in the country. The per capita

consumption of natural gas in India is only around 29

SCM as compared to the world average of 363 SCM.

There is clear room for growth even accounting for

the fact that gas may not be able to displace coal in

the power sector to the extent it may have in other

developed countries. In this scenario, gas

transmission business plays a momentous role

linking the supply sources and the consumers both

industrials and retail. Higher amount of availability

of the resources (Gas) and the impressive growth in

the pipeline infrastructure in the state also shore up

the rationale to invest in the sector. Presently, gas

accounts for 10% of total energy consumption in

India, while the world average is 24%. Historically,

there has always been a huge gas deficit in the

country. However, with the estimated increase in gas

supply from new domestic discoveries and new LNG

capacities, we estimate gas demand to increase

substantially. Faster growth is estimated from CGD

(City Gas Distribution) and from refineries and

petrochemicals, which are trying to reduce their fuel

costs and losses. The current grid operations of GSPL

account for 1,666 km in the state. GSPL had made a

bid for four projects —Mallavaram-Bhilwara (1,600

KM), Mehsana- Bhatinda (1,670 km), Bhatinda-

Jammu-Srinagar (740 km) and Surat-Paradip (1,680

Km). Of these four pipeline projects, PNGRB had

invited bids for the first three projects and GSPL has

won the first two and has become the most

competitive bidder for the remaining. These projects

stand as the most supporting pillars, calling for an

investment in the company. Besides, the company

has impressive profitability figures with the ROE

stands at 29%, ROCE at 27% and ROA at 17%. These

are better among the peers. As a sign of growing

business, GSPL has been retaining 86% (Payout ratio:

14%) of the earnings with it and had paid 10%

dividend for FY10. In short, with good prospects of

growth, the stock is trading at levels where one can

enter for a long term. In the coming years, the

increased availability of the gas and increasing

pipeline infrastructure gives an assurance to the top

line as well as bottom line. Another area to be

looked at is that the company's transmission

volumes will pick up in upcoming quarters as the

supply sources would become very active when the

KG Basin’s production picks up. Beyond two years

(FY12), the scenario is quite promising with the

interstate pipelines. When the pipelines become

operational; it would be a turning point in the

company’s journey.

In short, since the downside risk is, comparatively,

low, even those who are risk averse in nature can

enter the stock with a one year to one and half year

perspective.


13

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 Equity


14

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 2.9


15

FINANCIALS GRAPH AND PEER GROUP COMPARISON

Source: Multiple Sources

Company Name Year End

Net Sales PBIDT PAT EPS(Unit

Curr) PBIDTM% PATM% ROCE% ROE%

Eastern Gases FY10 38.4 1.84 0.47 0.67 4.79 1.23 15.44 6.71

GAIL India FY10 24996.4 5210.29 3139.8 24.75 20.53 12.37 27.15 19.89

Mahanagar Gas Ltd.

FY10 639.4 262.92 147.01 16.45 37.37 20.89 34.32 23.41

Rel. NatRes FY10 270.02 167.08 69.87 0.43 61.88 25.88 5.34 3.96

Guj. Petronet FY10 991.9 957.21 413.7 7.36 96.5 41.71 27.8 29.82

Source: Ace Equity

Source: Ace Equity


16

December 29, 2010

Pipeline companies may be able to charge a lower tariff rate than determined by the board. The Board has proposed amending the PNGRB (Determination of Natural Gas Pipeline Tariff) Regulations, 2008, and has invited comments from stakeholders and experts. The issue came up in a pre-bid conference for pipelines and some bidders had wanted to know if they could offer a rate lower than what was determined by the Board.

ANALYST NOTES AND COMPANY NEWS


17

Researched and prepared by:

Muhammed Aslam E

Fundamental Analyst

Email: [email protected]

Ph: (0484) 3040400, 3040419

In co-operation with:

Amar Chandramohan Sr. Fundamental Analyst Email: [email protected]

Krishnan Thampi K

Head of Research and Strategies


HEDGE RESEARCH & STRATEGIES GROUP

Head of Research: Krishnan Thampi K

Sr. Fundamental Analyst: Amar Chandramohan

Jr. Fundamental Analyst: Muhammed Aslam E

Sr. Equity Technical Analyst: Anish Chandran C V

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Jr. Technical Analyst: James George

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Disclaimer

The 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 for

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Gspl initiating coverage