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Gujarat State Petronet: A brief overview` - Views on News from Equitymaster
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Gujarat State Petronet: A brief overview`
Apr 11, 2007

Gujarat is one of the most industrialized states in India and energy being lifeblood of industries; the demand for petroleum products and natural gas is expected to rise further in the state. According to CRISIL estimates, demand for natural gas in Gujarat is expected to increase to 94.5 mmscmd by 2010. A rather developed natural gas distribution and transmission infrastructure and cost advantages vis-à-vis other energy sources such as coal will make sure that the demand story does not get disrupted. Given the inherent advantage associated with the natural gas compared to the alternative fuels and enhanced gas supplies going forward (both from domestic and international sources (through LNG), share of natural gas in the energy matrix is going to rise in the country in general and Gujarat in particular. The key beneficiary of this trend is likely to be Gujarat State Petronet Limited (GSPL). In the current article, we would investors a brief overview of the GSPL and what lies ahead for the company.

Background and business model of the company

  • GSPL is a 38% subsidiary of Gujarat state petroleum corporation, a Gujarat government promoted company and a dominant player in exploration and production (E&P) of oil and gas in Gujarat. GSPL was incorporated in 1998 to develop the infrastructure for the gas transportation in the state of Gujarat.

  • GSPL, a pure transmission company, is the second largest natural gas transmission company in India.

  • It is the first company to operate on ‘open access’ basis in the country (i.e. the transmission capacity is available to any shipper on non discriminatory basis.) and is connected to all major natural gas supply sources like Petronet LNG, Cairn Energy and GSPCL.

  • The users comprise industries such as power, fertilizers, steel, chemicals plants and local distribution companies.

  • Company started its operations in 2000 after completion of the first segment of its network.

  • GSPCL operates medium-to-high-pressure gas transmission network comprising 1,090 kms of natural gas pipeline. The company is further building 425 kms of pipeline network.

  • GSPCL currently transports around 16 MMSCMD of natural gas in the state of Gujarat, which includes R-LNG to the tune of 8 MMSCMD.

GSPL has signed long term GTAs (gas transport agreements) to the tune of 33 MMSCMD with various customers. This includes the recent agreement signed by the company with Reliance Industries for transporting its gas (from Bharuch to Jamnagar) to the tune of 11 MMMSCMD from FY09 onwards. The agreement is for a period of 15 years and with the signing of this long-term agreement, the earnings visibility for the company has improved significantly.

GSPL also stands to gain from the recent budget proposal, which provided a tax holiday of 7 years to new pipelines to be built. Another positive for the company is the increasing maturity of gas markets in Gujarat. Recent successful marketing of Petronet LNG’s spot cargoes has prompted Shell and Petronet LNG to resort to buying spot cargoes internationally.

Financial background
GSPL enjoy high EBDITA margins due to higher capacity utilisation along with lower operating expenditure. GSPL has registered a growth of 45% and 30% in revenues in FY05 and FY06. The growth was largely a factor of increase in transportation volumes, which increased by 26% in FY05 and 27% in FY06. The transmission charges per SCM (standard cubic meters) increased marginally from Rs 0.58 per scm in FY04 to Rs 0.68 per scm in FY06. EBDITA margins have improved in the past few years on account of economies of scale and better utilisation of pipeline capacity. EBDITA margins are likely to further improve in the future with growth in volumes to the tune of 3 times in next 3-4 years.

Currently, company depreciates its pipelines over the period of 12 years as it follows the straight-line method of depreciation (8.33% p.a.). However, the economic life of pipelines is around 25-30 years, this is likely to overstate depreciation based on economic considerations. Higher depreciation leads to lower net margins for the company. Cash profits have grown at 47% and 54% over the past two years.

Financial snapshot…
(Rs m) FY04 FY05 FY06 9mFY07
Revenues 1,402 2,035 2,635 2,344
Other income 16 2 4 124.5
Total expenditure 601 742 692 374.4
EBIDTA 801 1,293 1,942 1,970
EBIDTA margin (%) 57.2% 63.5% 73.7% 84.0%
Depreciation 398 656 791 681
Financial expenses 252 345 372 293
Profit before tax 168 293 783 1,121
Prior period adjustments 10 0.4 0.6 0
Adjusted profit before tax 178 294 784 1,121
Tax 160 133 317 420
Net profit before Extraordinary items 18 160 467 701
Net profit margin 1.3% 7.9% 17.7% 29.9%
Annualised EPS (Rs)* 0.0 0.3 0.9 1.7
Annualised CEPS (Rs)* 0.8 1.5 2.3 3.4
* EPS is calculated on diluted basis.

What to expect?
At the current price of Rs 52, the stock is trading at a price to earnings of 15.3 times (Annualised 9mFY07 cash earnings). Going forward, company is expected to increase the transportation volumes from the current level of 16 MMSCMD to 33 MMMSCMD by FY09. This will result in faster revenues and earnings growth for the company. Company is also likely to benefit due to tax savings on new gas pipelines. Company has witnessed a significant expansion of EBDITA margins over the past few years, which has continued in the current year too. Going forward, we might see further expansion of 3%-4% in EBDITA margins. GSPL has a superior business model based on open access system. Long term GTAs along with stable transportation margins makes GSPL’s stock to be a less risky stock.

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