Midcap Oil & Gas Sector Stock Gave 16.57% In 1 Month, Brokerage Suggests "Buy" For Robust 30% Gains

Leading Brokerage firm Motilal Oswal in its recent report recommends "Buy" Gujarat State Petronet Limited (GUJS) with a target price of Rs. 351/share. According to the given target price, if the stock is purchased at the current market price, it could give a positive return of up to 20% returns. It is a mid-cap Oil & Gas sector company having a market capitalisation of Rs 15,318.34 crore.

Stock Outlook & Returns

The current market price (CMP) of the stock on NSE is Rs 271.50 apiece, gaining 1.34% compared to its previous close. The stock touched its 52 week high level on 12 January 2022 at Rs332.40 and its 52 week low level recorded on 24 June 2022 at Rs 209.45, respectively.
It has given 4.02% positive return in the past 1 week, and 16.57% in the past 1 month, respectively. It has given 7.48% positive returns in the past 3 months and 13.51% negative returns in the past 1 year, respectively. Over the past 3 years, the stock has given 25.87% positive return in 3 years, and 33.32% in 5 years, respectively.

Navigating the ifs and buts of the tariff revision that may occur

Except for FY20, when the tax write-back on account of the adoption of the new tax rate resulted in a RoCE of 17.5%, the average RoCE for GUJS stood at 12% since FY18, which is the regulated post-tax return as per the Petroleum and Natural Gas Regulatory Board (PNGRB). Excluding long-term investments of INR52b, RoCE over FY18-22 (except FY20) stood at 29.1%, much above the regulated RoCE.  The above, combined with expected investments of INR45b in two phases, calls for a detailed study of different scenarios to evaluate what the tariff for the high pressure (HP) gas grid may be revised to to going forward. A capex of INR20b in Phase I and no extension to the economic life beyond FY32 may result in a tariff of INR49/mmBtu from INR34/mmBtu at present. If we take into account the full capex of INR45b, along with the extension of economic life to FY42, the tariff may be revised to INR48/mmBtu instead.

 

GUJS' proposal to PNGRB

GUJS, in its submission to PNGRB, has estimated a capex of INR45b divided into two parts: INR26b on pipelines and INR20b on O&M. The main items under pipelines include INR12b on the Anjar-Palanpur pipeline, INR3b on the Dahej-Bhadbhut pipeline replacement, and INR2.8b on the JamnagarOkha pipeline. O&M includes INR13b on spur pipelines. Using the above capex, the revised lower tax rate, transmission volume of 26mmscmd, and an economic life up to FY32, the company has proposed a tariff of INR54/mmBtu as against the existing INR34/mmBtu.

A study of ifs and buts

In the past, PNGRB calculations have differed significantly from that of the street. We evaluate various combinations of transmission volume, capex, and economic life. If we were to use only Phase I capex of INR20b, transmission volume of 30mmscmd, and an economic life up to FY32, we estimate that tariff might be revised to INR48/mmBtu, instead of the INR54/mmBtu proposed by GUJS and the existing tariff of INR34/mmBtu. Even if we were to factor in a capex of INR20b and extend the economic life to FY42, with higher average transmission volumes of 35mmscmd, then too the implied tariff will stand at INR43/mmBtu. In FY18, GUJS raised its stake in GUJGA to 54.2% from 25.8%. GUJGA posted a PAT of INR2.2b in FY17 v/s INR5b for GUJS. Hence, the period up to FY17 may be considered a good proxy for estimating the long-term one-year forward P/E ratio of GUJS' standalone business, which is 12.3x.
 
 

Buy stock for a target price of Rs 351/share

The brokerage said, "We do not foresee a reduction in existing tariff due to the high capex proposed. Using the existing tariff, we estimate an FY24 EPS of INR19.3 for GUJS. If the PNGRB were to disallow even Phase I capex and cut tariff by 15%, the EPS will still work out to INR14.4. The value of investments, at a 25% holding company discount, stood at INR260/share. Valuing the core at a long-term one-year forward P/E ratio of 5x, we derive a standalone value of INR91, with no cut in tariff. This will be revised down to INR72, with a 15% cut in tariff."
 
 It added, "While it is difficult to accurately determine the tariff revisions, without any cut in tariff, our TP for GUJS stands at INR351. With a 15% cut in tariff, our TP gets revised down to INR332, resulting in an upside of 24% from its CMP. We reiterate our Buy rating on the stock."
 

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.