>GSPL (KR Choksey)

Investment Rationale: Contribution to Gujarat Socio-Economic Development Society (GSEDS) will be up to 30% of PBT and every year board have to pass the resolution. No contribution to make, if the projects are not identified by GSEDS and Income Tax department not giving tax exemption certificate. Management is in opinion that PNGRB will not approve social contribution as expenses when setting the tariff. For the FY09 GSPL yet to provide social contribution; however we have taken conservative approach and provided 30% of PBT in our estimates. Recent increase in tariff largely due to current lower post tax RoCE of ~11.5% vs regulated post tax RoCE of 12%.

Other developments: It has filed an EoI with PNGRB to lay pipeline between Mallavaram, AP and Bhilwara, Rajasthan of 30mmscmd capacity largely to cater gas flowing from GSPC in FY2012. Management has not ruled out further equity investment in GSPC Gas Company Ltd and Sabarmati Gas Limited which are developing CGD network in Gujarat. Capex for FY09 be ~Rs 400 crore and FY10 be Rs 250 crore. Capitalization of Bharuch-Jamnagar pipeline after KG D6 gas flow.

Financial performance: GSPL reported net sales of Rs 110.6 crore, up 6.2% y-o-y & -1.0% q-o-q in line with our expectations. However volume was below our expectation and declined to 13.1mmscmd, de-growth of 25.8% y-o-y and 15.8% q-o-q due to the competitive naptha prices in the quarter. Operating profit of Rs 101.6 crore, up by 4.6% y-o-y, higher staff & O&M expenses reduced the profit margin by 128 bps. PAT was down 9.7% y-o-y and 2.6% q-oq due to lower operating profit and other income.

Valuation: We have reduced our volume expectation to 26.5mmscmd & 36mmscmd due to delay in KG Gas D6 volume to RIL Jamnagar refinery, 30% of PBT towards social contribution, and changing competitive pricing in naptha prices. We have reduced our FY09, FY10 & FY11 earnings from the Rs1.7, Rs2.7 & Rs3.4 to Rs1.4, Rs2.2 & Rs 3.9. However, at the same time the current valuations are not factoring the meaningful volume increase beyond 2HFY11 and any upside from its expansion beyond Gujarat. At the CMP of Rs 33, GSPL is trading at 6.2x its TTM CEPS and 7.3x its FY09E CEPS of Rs 4.5. We maintain a BUY on the stock with target price of Rs 40, giving an upside potential of 20%.

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