Gujarat State Petronet Ltd

The Petroleum and Natural Gas Regulatory Board (PNGRB) has recently in November 2022 made key amendments to natural gas pipeline tariff regulations and we perceive them as positive for Gujarat State Petronet Limited (GSPL) as it removes long pending overhang on gas pipeline tariffs. In our view, GSPL’s gas pipeline tariff would benefit from prospective implementation of lower tax rate from FY24 (versus retrospective impact from FY21-23) and allowance of transmission loss at 0.1% of the actual volume. Amendments for volume ramp-up (capacity utilisation ramp-up to 10 years versus 5 years earlier) and exclusion of new gas source for 5 years for tariff calculation would play a crucial part in revival of capex cycle for GSPL’s core gas pipeline business. We maintain a Buy on GSPL with a revised PT of Rs.342.
* Recent announcement of gas pipeline tariff reforms – a positive step by regulator: PNGRB has recently announced several amendments for gas pipeline tariff and key amendments are – 1) An increase in time period for capacity utilization ramp-up to 10 years (as compared to 5 years currently), 2) Allowed accounting for transmission loss at 0.1% of actual volume, 3) Tax rate of 25.17% would be applicable from FY24 and not retrospective, 4) Exclusion of new gas source for five years for tariff calculation, 5) introduced entity level integrated natural gas pipeline tariff, 6) number of tariff zones for unified tariff (applicable from April 2023) has been increased to three from two and 7) tariff computation may provide for annual tariff hike.
* GSPL benefits immensely from tariff amendments: The impact from shift to a lower tax rate regime of 25.17% (versus 33.3% earlier) on GSPL’s tariff is expected to be much lower than street expectation of 15-20% as the tariff amendments excludes impact of lower tax rate on tariff for FY21-23 as it is prospective i.e. from FY24. Additionally, allowing transmission loss at 0.1% of the actual volume, multiplied by the gas price would further support tariff of GSPL. Thus, a likely cut in net transmission tariff would be much lower than our/street estimate of 10%/15-20%. We currently maintain our FY23-25 earnings estimate for GSPL.
* Pipeline tariff amendments to support pipeline capex and drive long-term volume growth: PNGRB’s tariff amendments state that any addition in gas pipeline capacity due to any new natural gas source (like LNG terminal or domestic gas discovery) after April 2020, than in that case addition of such new source shall not be considered in the tariff determination for a period of five years from the date of commissioning of the pipeline connectivity due to the relevant source. This would accelerate completion of connecting pipelines (capex estimated at Rs. 2000 crore) to LNG terminal at Mundra (GSPC), Charra (HPCL) and Pipavav (Swan Energy). Moreover, the relaxation of volume ramp-up to 10 years would aid in development of new pipeline and the same would drive long term transmission volume growth for GSPL.

Our Call
Valuation – Maintain Buy on GSPL with a revised SoTP -based PT of Rs. 342: 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 a 20% holding company discount) is close to GSPL current market capitalization of Rs. 15,070 crore). Hence, we maintain Buy on GSPL but with a revised SoTP-based price target (PT) of Rs. 342 (reflects higher valuation for standalone gas pipeline business and for its 54% stake in Gujarat Gas).

Key Risks
Lower-than-expected gas demand from power, fertilisers, refineries, and CGD due to a spike in LNG prices could affect gas transmission volumes. Any adverse regulatory changes in terms of gas transmission tariffs. Delay in volume ramp-up at new LNG terminals.

Investment theme
Higher gas supplies with commissioning of new LNG terminals in Gujarat, rise in domestic gas supply, and government’s target to increase share of gas in India’s energy mix to ~15% by 2030 (from 6% currently) and thrust to reduce pollution provide a strong gas transmission volume opportunity for GSPL. Investment in CGD space (Gujarat Gas and Sabarmati Gas) is likely to create long-term value for investors. Core pipeline business is effectively available free to investors as GSPL’s market capitalisation is close to its market value of investment in Gujarat Gas.

Refer: GSPL for more details.