>Gujarat State Petronet (ANGEL BROKING)

Stepping on Gas....

Gujarat State Petronet (GSPL) has borne the brunt of adverse developments such as 30% profit sharing with the Government of Gujarat, delay in arrival of KG gas (due to the Gas Allocation Policy), execution risks of new pipelines and deteriorating fundamentals of the Spot LNG markets. As a result, the GSPL stock witnessed a steep 66% correction on the bourses from its highs. Nonetheless, we expect the company to remain on high growth path with concerns receding on the economics of Spot LNG and KG gas expected to flow during the year. We have arrived at a Fair Value of Rs42 (at a higher cost of Equity of 17%) from Rs80 for the stock factoring in the 30% profit sharing (barring which our Target Price would stand revised at Rs60) and assumption of backended volume growth. We recommend an Accumulate on the stock.

■ Deeper connectivity and Exclusivity in Gujarat: A strong industrial base, a developed gas transportation infrastructure and better connectivity with the end consumers have led to a steep increase in demand for natural gas in Gujarat. GSPL, being the largest gas transporter in the state, stands to benefit from the same.

■ Increasing Transmission volumes to improve fundamentals: We believe that GSPL is the best play on the improving gas supplies in the country. Robust Spot LNG dynamics, increase in re-gasification capacity at Dahej, Hazira and commissioning of the new R-LNG terminal at Dabhol are likely to provide an opportunity to GSPL to transmit additionalR-LNG volumes going ahead. RIL is also likely to start production from its KG-D6 block next month, which will augment GSPL’s volumes during the latter part of FY2010. Overall, we estimate GSPL's volumes to increase significantly in FY2010E posting a robust CAGR of 20.2% over FY2008-10E from 16.8mmscmd to 24.7mmscmd.

■ Negative developments, major Execution risks factored in: Various negative developments such as 30% profit sharing with the Government of Gujarat, uncertain volume outlook and Execution risks involved in building and capitalisation of new pipelines are largely factored in and thus, limiting further downside from current levels.

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