Stock To Buy: Gas Stock That Is To Benefit From Pricing Tariff

Indian Brokerage firm Sharekhan has recommended buying the stock of Gujarat State Petronet LNG (GSPL). The firm sees a good upside potential on the stock on a favourable pricing tariff.

Infrastructure expansion and regulatory push to drive strong gas demand

Sharekhan expects strong growth in transmission volumes for gas utilities such as GAIL and GSPL to be supported by a robust gas demand outlook, which in turn would be due to: 1) demand recovery from the power, CGD and fertiliser sectors and 2) regulatory push to switch to gas from polluting industrial/auto fuels. "Moreover, the recently-notified unified tariff for gas pipeline operators (although it is revenue neutral in the short term) provides a massive volume opportunity and would drive growth in the long term," Sharekhan has said.

Long growth remains intact

Although near-term volumes are likely to remain under pressure given volatility in spot LNG price but long-term growth outlook remain robust as India's focus is towards a gas-based economy. "We expect GSPL's gas transmission volume to increase strongly by 7% CAGR over FY2022-FY2025E. The amendment in natural gas pipeline tariff regulations are positive and we model net transmission tariffs of Rs. 1.3/scm over FY2024E-2025E post expectation of 10% cut in FY24E). We expect GSPL's standalone EBITDA/PAT to post a 5% CAGR over FY2022-FY2025E. However, capex to augment pipeline capacities would result in better gas transmission tariff and support earnings of GSPL," the brokerage has said.

Price target of Rs 342 on the stock of Gujarat State

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 20% holding company discount) is close to GSPL current market capitalization of Rs. 15,211 crore). Hence, we maintain a Buy on GSPL but with a revised SoTP-based price target of Rs. 342 (reflects higher valuation for standalone gas pipeline business and for its 54% stake in Gujarat Gas)," the brokerage has said.

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 making any investment decision.