Sharekhan Considers This Mid Cap Gas & Petroleum Sector Stock A Good Buy, Target Price Rs 342

1. Gujarat State Petronet Ltd Stock Performance & Return

The last trading price of the stock is Rs 266 apiece with a decline of 0.22% intraday. The stock's 52-week high is quoted at Rs 332 apiece and 52-week low is Rs 209 apiece, respectively. The stock has given 26% return in last 5-years, 20% return in last 3-years, and declined 12% in last 1-year. It has rallied 11% in last 3-months and 15% in last 1-month.

2. Gujarat State Petronet Ltd Benefits Immensely From Tariff Amendments

The impact from shift to a lower tax rate regime of 25.17% (versus 33.3% earlier) on GSPL's tariff is expected to be much lower than street expectation of 15-20% as the tariff amendments excludes impact of lower tax rate on tariff for FY21-23 as it is prospective i.e. from FY24.

Additionally, allowing transmission loss at 0.1% of the actual volume, multiplied by the gas price would further support tariff of GSPL. Thus, a likely cut in net transmission tariff would be much lower than our/street estimate of 10%/15-20%.

3. Pipeline Tariff Amendments To Support Pipeline Capex

PNGRB's tariff amendments state that any addition in gas pipeline capacity due to any new natural gas source (like LNG terminal or domestic gas discovery) after April 2020, than in that case addition of such new source shall not be considered in the tariff determination for a period of five years from the date of commissioning of the pipeline connectivity due to the relevant source.

4. Valuation

According to Sharekhan, "Regulatory tailwinds, potential higher domestic gas production and proximity to LNG terminals (27.5 MTPA re-gas capacity) make GSPL a strong long-term bet on the robust outlook for gas demand in India. We highlight here that GSPL's core pipeline business is effectively available free to investors as the market value of GSPL's investment in Gujarat Gas (after assuming a 20% holding company discount) is close to GSPL current market capitalization of Rs. 15,070 crore). Hence, we maintain Buy on GSPL but with a revised SoTP-based price target (PT) of Rs. 342 (reflects higher valuation for standalone gas pipeline business and for its 54% stake in Gujarat Gas)."

Key Risks: Lower-than-expected gas demand from power, fertilisers, refineries, and CGD due to a spike in LNG prices could affect gas transmission volumes. Any adverse regulatory changes in terms of gas transmission tariffs. Delay in volume ramp-up at new LNG terminals.

5. Gujarat State Petronet Ltd About

GSPL, a group entity of the GSPC group, is currently a Gujarat-focused natural gas transmission firm operating on an open access basis. The company owns approximately 2,500 km natural gas pipeline, transporting 38- 40 mmscmd of gas.

Disclaimer

The stock has been picked from the brokerage report of Sharekhan. 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 taking any investment decision.