16 Mar , 2022 By : monika singh
Key points: Gujarat State Petronet’s (GSPL) 3Q 21-22 volume was lower (31.9mmscmd versus 37.5mmscmd in the last quarter) due to a lower intake by the power segment, which decreased to 2.1mmscmd from 5.1mmscmd qoq. CGD volumes during the quarter were constant at 13mmscmd. In the near term, volumes will be impacted because of higher spot LNG prices, but with c90% volumes on term contracts and local production (as opposed to spot contracts), we think the downside is already factored into the stock price. We reduce our earnings to reflect the impact and do not assume spot volumes will reach pre geopolitical issues level over 12-18 months.
Overall, the long-term story remains intact with increased demand for clean fuel like LNG. Any rise in demand for gas in the medium-to-long term is also likely to benefit GSPL’s subsidiary, Gujarat Gas (54.2% owned by GSPL, GUJGA, INR525, Not Rated). Based on updated numbers, the stock is trading at 4.5x EV/EBITDA (ex Gujarat Gas investment in EV) on 2023e numbers, which makes the valuation attractive with limited downside (even if gas price remains at elevated levels in the near to medium term).
What’s changed: We change our estimates to reflect the actual volumes in 3Q, realisations, current high spot LNG cargo costs and other cost items. We continue to expect volumes from city gas distribution and the industrial segment to ramp up over the next 2-3 years. This results in a lowering of sales forecasts by 7.1%/6% in 2022/23e while our EBITDA estimates decrease by 12.4%/10.7% in each of the next two years. This along with a decline in the share price of the subsidiary, Gujarat Gas, lowers our target price.
Our view: In the long run, gas volumes will continue to rise with the shift towards cleaner fuel, helped by increased LNG offtake capacity in GSPL’s core markets. In the near term, spot LNG shipments could come down as LNG prices are at historically high levels. Gujarat Gas could also benefit from growing demand in key markets in the city gas distribution business, as well as the government’s focus on gas.
Valuation: maintain Buy; lower TP to Rs 310 from Rs 406. Our valuation is based on a sum-of-the-parts (Rs 310.2 per share). We use DCF to cross-check our SOTP valuation (Rs 320.0 per share). We value Gujarat Gas at a 50% holding company discount to the current market price. We lower our target price to Rs 310 from Rs 406 based on lower estimates and a lower value for the subsidiary, implying 15.5% upside. We maintain our Buy rating on the stock.
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