>GUJARAT STATE PETRONET (ICICI SECURITIES)

Geared to excel

Gujarat State Petronet (GSPL) enjoys a well entrenched network of gas transportation pipelines across Gujarat and is all set to benefit from additional supplies from the KG-Basin and increased LNG capacities in India. We estimate GSPL to report impressive net income CAGR of 17% in FY08-FY11E led by 29% gas transmission volume CAGR. Corporate Social Responsibility (CSR) contribution of 30% to the Gujarat Government is the key overhang on the stock. We value GSPL at Rs56/share based on FCFE-DCF methodology assuming 30%
CSR contribution and 13% RoCE over the life of GSPL’s pipelines owing to higher spot contracts, efficient operations etc (versus 12% allowed return by Petroleum & Natural Gas Regulatory Board, PNGRB). If the Gujarat Government were to abolish 30% CSR, GSPL’s fair value would rise to Rs78/share. We initiate coverage on GSPL with BUY rating.

■ Rising gas supplies imply higher growth visibility. Increasing domestic supplies led by Reliance Industries’ (RIL) KG-D6 field and new LNG terminals would lead to ~2.5x rise in gas supply in the next 3-4 years, thereby improving growth visibility. Gas volume CAGR of 29% would lead to 17% net income CAGR over FY08-11E.

■ Gas Pipeline Policy – Exceeds expectations. PNGRB has allowed 12% post-tax RoCE on inter-state pipelines. We expect GSPL to generate better returns through higher spot volumes, lower depreciation, leveraging balance sheet and lower effective volume assumption in the first four years of operations.

■ RIL-Reliance Natural Resources stand-off will not affect GSPL. The market is concerned on diversion of gas supply to Reliance Natural Resources (RNRL), which decreases transmission volumes via GSPL pipelines. But lower gas volumes would lead to higher tariffs as returns are regulated. As spot volumes are excluded while calculating regulated returns, higher spot volumes would be beneficial.

■ Understated book value; valuations attractive. Due to GSPL’s aggressive depreciation policy, its book value (BV) is understated. GSPL’s FY09 BV/share, at 3.17% depreciation, would have been Rs28.9 versus Rs21.7, which will likely be reported by GSPL. We value GSPL at Rs56, implying adjusted FY09E P/BV of 2x.

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