GSPL: Poor volumes drag performance

Gujarat State Petronet Ltd (GUSP) has announced its results for fourth quarter of the fiscal year 2013-2014 (4QFY14) The net sales have declined by 35.7% on a year on year (YoY) basis while net profits for the quarter declined by 43.4% YoY

Performance summary

• Revenues for the quarter registered a decline of 35.7% YoY on the back of lower gas volumes and lower tariffs. For FY14, the revenues registered a decline of 10.4% YoY.
• Operating profits during the quarter declined by 38.7% YoY with margins at 86.8% as compared to 91.1 % in 4QFY13. For FY14, the operating profits declined by 13.4% YoY with operating margins at 88.4%, as compared to 91.4% in FY13.
• Net profits for the quarter declined by 43.4% YoY with net profit margins at 39.5%, as compared to a net profit margin of 44.9% in 4QFY13. For FY14, the net profits declined by 22.1% YoY, with net profit margins at 39.9%, versus 45.9% in FY13.

Standalone financial summary

(Rs m)	4QFY13	4QFY14	Change	FY13	FY14	Change
Gas volumes (mmscm)	1,994	1,869	-6.3%	9,966	7,693	-22.8%
Sales	3,598	2,314	-35.7%	11,732	10,507	-10.4%
Expenditure	322	306	-5.0%	1,012	1,219	20.4%
Operating profit (EBDITA)	3,276	2,008	-38.7%	10,720	9,288	-13.4%
EBDITA margin (%)	91.1%	86.8%	-4.3%	91.4%	88.4%	-3.0%
Other income	149	145	-2.6%	660	552	-16.4%
Interest (net)	315	319	1.2%	1,263	1,418	12.3%
Depreciation	480	449	-6.4%	1,861	1,839	-1.2%
Profit before tax	2,630	1,385	-47.3%	8,257	6,583	-20.3%
Pretax margin (%)	73.1%	59.9%	-13.2%	70.4%	62.7%
Tax	1,015	471	-53.7%	2,876	2,391	-16.8%
Effective tax rate (%)	38.6%	34.0%	-4.6%	34.8%	36.3%	1.5%
Profit after tax/(loss)	1,615	915	-43.4%	5,381	4,191	-22.1%
Net profit margin	44.9%	39.5%	-5.4%	45.9%	39.9%	-6.0%
No. of shares (m)					563
Diluted earnings per share (Rs)*					7.4
Price to earnings ratio (x)**					12.4

**On trailing 12 months basis

What has driven performance in 4QFY14?

• The net sales declined by 35.7% YoY mainly on account of fall in the gas transmission volumes (down 6.3% YoY) and decline in average transmission tariffs. The gas volumes for the quarter stood at 1,869 million standard cubic metre (mscm), down 6.3% YoY and marginally higher on a quarter on quarter (QoQ) basis. The average implied transmission tariffs for the quarter declined by 31.5% YoY and were down by 6% QoQ. For FY14, transmission volumes stood at 7,692.8 mscm, down 22.8% YoY. However, this was offset to some extent due to higher tariffs (up 16.5% YoY).

• The operating profit margins during the quarter slipped to 86.8%, down from 91.1 % in 4QFY13. This was mainly on account of decline in the volumes and lower tariffs. Further, the company witnessed an increase in operational expenses (as a % of sales) during the quarter on a YoY basis. For FY14, operating margins declined by 3% YoY on account of lower transmission volumes and higher operational expenses (as a % of sales).
  Cost break-up

  (Rs m)	4QFY13	4QFY14	Change	FY13	FY14	Change
  Employee benefit expenses	55	59	6.9%	247	287	16.2%
  % of sales	1.5%	2.6%		2.1%	2.7%
  Operation and Maintenance expense	177	160	-9.8%	514	671	30.7%
  % of sales	4.9%	6.9%		4.4%	6.4%
  Other expense	89	87	-2.9%	251	260	3.6%
  % of sales	2.5%	3.8%		2.1%	2.5%
  Total expenses	322	306	-5.0%	1,012	1,219	20.4%
  % of sales	8.9%	13.2%		8.6%	11.6%

• The net profit margin for the quarter declined by 5.4 % YoY. This was on account of weak operational performance. The depreciation and interest expense increased (both as a % of sales) on a YoY basis. However, this was offset by a lower effective tax rate. For FY14, the net profit margin stood at 39.9%, down from 45.9% in FY13. A weak operational performance, higher effective tax rate and increase in depreciation and interest expense contributed to the decline.

What to expect? The decline in gas volumes is a major concern for the company. Apart from fall in domestic gas supplies, higher LNG cost is also a cause for the muted volumes.

We expect the volumes to remain low and as such the company suffers from capacity underutilization risks. Further, there is a risk to realizations in the case of take or pay contracts. Going forward, the triggers for the stock will be higher gas supplies and rupee appreciation.

The stock of GSPL breached our target price of Rs 88 sometime back. At the current price of Rs 92, the stock is trading at price to earnings ratio of 12.4 times with respect to trailing 12 months earnings. Considering the concerns mentioned above, we believe that the GSPL's stock is trading at expensive valuations. We recommend investors to Sell the stock at current price levels.