The government, in an attempt to incentivize setting up of gas infrastructure in the country, has provided investment based tax exemptions (Section 35AD) for oil/gas pipelines commissioned on or after April 2007.
However, the tax holiday under section 80-IA received on earnings from gas pipelines would be withdrawn. Gujarat State Petroner Limited (GSPL), we reckon would have invested close to Rs30 billion over FY07-FY11E, and hence would be a beneficiary of this move.
We wait for further clarification on this front and hence our target price excludes benefits from this move.
Volumes transmitted in Q4FY09 stood at ~13mmsmd, a contraction of 28% y-o-y as economic headwinds reduced gas demand.
Augment of KD-D6 gas in April ’09, concomitant with stable rLNG supplies have resulted in volumes jumping to 31mmscmd by end of Q1FY10. We expect GSPL to report volumes of 33mmscmd and 48mmscmd in FY10E and FY11E respectively, implying a CAGR of ~80% over FY09-FY11E.
The robust growth in volumes would come at the back of pipeline addition to the tune of ~1000kms over the same period.
We continue to believe that GSPL is a proxy to the robust growth currently being witnessed in the domestic gas volumes.
With a pipeline expansion plan of an additional ~1,000kms (existing ~1400Kms) in Gujarat, the company is contemplating a national presence with the Mehsana-Bhatinda (bidding stage) and Kakinada-Bhilwada pipeline.
With gas supplies expected to expand from 93mmscmd in FY09 to 215mmscmd by FY14E, over 100mmscmd would find its way into Gujarat (source: Crisil research), thereby boosting GSPL’s transmitted volumes.
We are revising our target price to Rs65 (v/s Rs45 earlier) based on a) reduction in cost of capital from 13% to 11.3% b) increase in earnings for FY10E-FY11E driven by higher volumes and realisations.
Commensurate to our step-up in the target price, we upgrade our recommendation from Sell to BUY. At Rs49, the stock is quoting at P/BV of 1.8x FY11E earnings.