Institutional Equity Research Gujarat State Petronet...

Compelling Valuation with Robust Long-term Prospects

Y/E March (Rs.mn) FY19 FY20E FY21E FY22E FY23E

Revenues 18,773 23,653 24,936 26,884 29,360

EBITDA 15,426 15,924 16,526 17,932 19,744

PAT 7,947 11,002 10,168 11,008 12,357

EPS 14.1 19.5 18.0 19.5 21.9

P/E 12.8 9.8 10.6 9.8 8.8

EV/EBITDA 7.3 7.3 6.9 6.2 5.0

Source: Company, RSec Research

f As gas power plants continue to remain the main driver of transmission volume of Gujarat State Petronet Ltd. (GUJS), we expect its gas transmission volume to grow by 3-5mmscmd in the next 2-3 years.

f Aided by lower LNG prices, the gas-based power plans are expected to consume 3-5mmscmd more in the next 2-3 years, which will lead to 8-12% upside in GUJS’ transmission volume and translate into 7%/11%/12% growth in FY21E/FY22E/FY23E EPS, respectively.

f GUJS is well-connected to most gas power plants in Gujarat, which are likely to start consuming more spot LNG. This will lead to improvement of GUJS’ transmission volume.

f We believe the sustained low spot LNG prices augurs well for the Gujarat based gas power plants, which are well connected to short distance LNG terminals through GUJS’ pipelines.

f Current spot LNG price, which is at 10-year low makes a strong case for higher consumption of spot LNG by 1,148MW Surat Generation Unit (SUGEN) and 1,200MW Dahej Generation Unit (DGEN). In case both the plants run at 85% PLF level, they can potentially consume ~6mmscmd of spot LNG.

f The Government has allocated Rs10.35bn in the last Budget to resume Power Sector Development Fund (PSDF) to subsidise the power generated by the stranded gas power plants, which augurs well for GUJS.

f GUJS is positioning itself to take advantage of surge in gas supplies from new LNG terminals in Gujarat.

The COVID-19 Impact: As per our estimate, GUJS is expected to witness gas transmission volume loss to the tune of <1.5mmscmd (~5% of total volume) in FY21E due to COVID-led disruptions. With ease in lockdown restriction post 20th April 2020, most industries like Ceramic, fertiliser, power, chemical and small industries (~15,000 units) have resumed operations at full capacity. (A detail analysis, Ref. page no.3)

Outlook & ValuationWe expect GUJS’s transmission volume to clock 8.3% CAGR, while its revenue and earnings to witness 12% and 14% CAGR, respectively over FY19-23E. As the outlook on spot LNG prices is subdued, we believe it may lead to positive surprises on volume growth front and thereby support GUJS’ core transmission earnings. Further, the earnings growth of its CGD subsidiary will get a boost, as 75-80% of its volume comes from the industrial customers, whose gas requirements are met through LNG sourcing. Resultantly, Gujarat Gas (GUJGA) is a play on weak LNG prices and growth in the CGD sector (Link of GUJGA IC / Note). We initiate coverage on GUJS with BUY and DCF-based 2-year Target Price of Rs286, which implies 44% upside from the CMP.

Share price (%) 1 mth 3 mth 12 mth

Absolute performance 23.4 (24.4) 0.1

Relative to Nifty 10.1 (1.7) 20.2

Shareholding Pattern (%) Dec-19 Mar-20

Promoter 37.6 37.6

Public 62.4 62.4

1 Year Stock Price Performance

Note: * CMP as on April 28, 2020

Research Analyst:

Yogesh PatilContact : (022) 3303 4632/9763153797

Email : [email protected]

Research Associate:

Pratik OzaContact : 9960358990

Email : [email protected]

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Gujarat State Petronet CMP* (Rs) 198

Upside/ (Downside) (%) 44

Bloomberg Ticker GUJS IN

Market Cap. (Rs bn) 112

Free Float (%) 62

Shares O/S (mn) 564

Oil & Gas | India

Institutional Equity Research

Initiating Coverage | April 29, 2020

BUY

Key TakeawaysGas-based power plants to drive gas transmission volume, which will translate into

7-12% growth in Gujarat State Petronet (GUJS) FY21-FY23E EPS.Fertiliser plant and GSPC’s cargoes to drive 10% volume growth. New pipeline to evacuate LNG from upcoming terminals in Gujarat.Petcoke Gasifier - Not a Threat to GUJS’ Volume.

2 Year Target Price: Rs.286

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Analyst Video

https://www.reliancesmartmoney.com/docs/default-source/research-reports/oil-gas/gujarat-gas---initiating-coverage---021219.pdf

https://www.reliancesmartmoney.com/docs/default-source/research-reports/oil-gas/gujarat-gas---company-update---160320.pdf

https://www.reliancesmartmoney.com/docs/default-source/research-reports/videopodcastpipesetcor/win_20200428_22_22_03_pro.mp4

1

Our Thesis

Exhibit 1: EPS & Target Price


Exhibit 2: Price Sensitivity AnalysisEPS (Rs) Growth (%) FWD P/E 10.0 13.1 14.5 15.5 16.5

FY17 (-3) 8.7 21.8 87 114 127 135 144

FY18 (-2) 11.9 35.8 16.0 119 155 172 184 196

FY19 (-1) 14.1 18.9 13.5 141 184 204 219 233

FY20E (Base Year) 19.5 38.4 9.7 195 255 283 303 322

FY21E (Year 1) 18.0 -7.6 10.5 180 235 262 280 298

FY22E (Year 2) 19.5 8.3 9.7 195 255 283 303 322

FY23E (Year 3) 21.9 12.2 8.7 219 286 318 340 362

Soure: RSec Research

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2

The COVID-19 Impact As per our estimate, GUJS is expected to witness gas transmission volume loss to the tune of <1.5mmscmd in FY21E due to COVID-led disruptions. With ease in lockdown restriction post 20th April 2020, most industries like Ceramic, fertiliser, power, chemical and small industries (~15,000 units) have resumed operations at full capacity.. As the Morbi, Gujarat based ceramic industry has resumed operations, gas transmission volume loss for GUJS is seen at 0.2mmscmd in FY21E. However, these ceramic players are likely to get more orders (Italy ceramic industry shutdown) that would compensate volume loss in the remaining part of year. Lower refinery runs could hit GUJS’ transmission volume by 0.5mmscmd in FY21E. Historically, gas consumption by the fertiliser plants remains lower in April on account of maintenance shutdown before ramp-up for Kharif and Rabi crop season. We believe, GUJS to witness <0.2mmscmd volume loss in FY21E. Demand from the power sector declined by 35% during the 1st half of Apr’20, which is likely to improve going forward, as a number of small industries have started operations.

Lockdown – Impact on GUJS’ Transmission Volume in Apr'20 & FY21

Gujarat State Industry Post 20th April 2020 - Update on Industry

Industry Gas consumption status GUJS volume loss due to lockdown and impact on FY21E

Morbi-based ceramic plants get gas through GUJS’ pipelines (Gujarat Gas CGD).

Out of 900 ceramic units in Morbi, 400 units resumed operations from 20th of April post relaxation in lockdown. The government will allow remaining units to start operations with strict guidelines in the next 2 days.

~ 50% units have started operations and the remaining to resume in the next 2 days, following which GUJS’ total gas transmission volume (6 mmscmd) to be restored back to the pre lockdown level

20 days gas transmission volume loss likely to hit GUJS’ average volume by 0.4mmscmd (1.5%) in FY21E.

Fertiliser plants which receive gas from GUJS pipelines are: (1) IFFCO: Kalol (Gandhinagar) (2)KRIBHCO: Hazira (Surat) (3)GNFC: Bharuch (Bharuch) (4)GSFC: Vadodara

(1)GSFC started normal operations on 11th April-2020; (2) GNFC’s- plant was shut for 21days in Apr'20, which is likely to resume operations very soon. Remaining 2 fertiliser plants are likely to start operations from 21st April with the necessary approval.

Historically, gas consumption of the fertiliser plants is lower in April on account of maintenance shutdown before ramp-up for Kharif and Rabi crop season.

Fertiliser sector consumes 4mmscmd of gas through GUJS pipelines. GUJS is likely to see an average volume loss of <0.2mmscmd in FY21E.

Refining Industry: GUJS transmit gas to RIL refinery

To cut refinery throughput in April, as the demand of petroleum products declined by 50%

GUJS transmitted 9.5mmscmd of gas to Reliance Refinery in 3QFY20. We believe, 50% decline in gas consumption in Apr'20.

Due to lower refinery runs in Apr'20, GUJS is expected to lose 0.5mmscmd of gas transmission volume in FY21E.

Power Plants: GUJS pipelines transmit gas for most power plants in the state out of total 13 power plants.

Power demand in Gujarat fell by ~35% in the 1st fortnight of Apr'20. In line with lower power demand, power generation would also be lower by 35% from pre-COVID level.

Gujarat-based power plants consumed 6.37mmscmd gas in Feb'20. GUJS transmits >80% of total gas consumed by these power plants. As per the Feb'20 gas consumption data, we expect, power plants would consume 4.2mmscmd gas in Apr'20.

We expect GUJS to witness volume loss to the tune of ~2mmscmd from power sector in Apr'20, which translates into <0.1mmscmd volume loss for FY21E

Other Industries: Small industries receive gas through GUJS’ pipelines

6,000 industrial units in Gujarat have resumed operations on 20th April post relaxation in nationwide lockdown, while ~15,000 industrial units will start operations in next few days. The sectors, which have started operations are: ceramic industry (Morbi), chemical industries (Bharuch), oil millers and engineering units (Rajkot), engineering units (Kutch and Ahmedabad)

The industrial units which started operations are the major gas consumers in the state. Further, Ahmedabad, Rajkot, Kutch and Surat are the major gas consuming districts.

Other industries consume 5mmscmd (~ 12% of GUJS’s gas transmission volume). Volume loss due to lockdown is pegged at c 0.2mmscmd for FY21E

Source: RSec Research

3

f Recently, we interacted with the Management of GUJS to get business update and clarity on the impact of COVID-led disruptions on its business.

f Update on Mehsana-Bhatinda Pipeline: Around 440 km of the said pipeline was commissioned in Nov’18. Till date, another 218km is completed out of the remaining 930 km at the rate of 3-4km/day. Rs13bn has already been spent for Phase-I. The entire Mehsana-Bhatinda pipeline is expected to be completed by Dec’20.

f Update on Mallavaram-Bhilwara Pipeline: Out of the total length, 400km has already been commissioned, while the remaining portion of pipeline is on hold. Capex to the tune of Rs8bn has been incurred till date. This pipeline will transmit gas for Ramagundam fertiliser plant at Kakinada, which has an agreement with GUJS for supply of 2mmscmd gas for 20 years. The plant is likely to start consumption of gas by 2QFY21.

f Gujarat State Petroleum Corporation (GSPC) bagged 1.2mmscmd of gas volume in 1st round of gas auction in Nov’19. Gas will flow through the GUJS pipelines.

f As per the Management, India does not have adequate infrastructure (LNG ports) to import cheap spot LNG, despite high demand of cheap gas. Whilst Mundra LNG port started operations with GUJS pipeline, the said pipeline has only 7-8mmscmd capacity.

f Swan Energy’s LNG terminal is likely to commence operations by Apr’21. GUJS will connect this terminal to main gas grid network.

f GUJS’s Barmer-Palanpur pipeline is evacuating a gas at rate of ~3mmscmd from Raageshwari deep gas field.

f Revision in Qatar R- LNG contracts is neutral for GUJS financials as of now, which is likely to improve, as 100% R-LNG off-take by all consumers will improve the overall gas transmission through GUJS pipeline.

f In 3QFY20, GUJS transmitted 9.5mmscmd of gas to Reliance Refinery, which led to higher gas transportation expenses. Gas transmission expenses are basically tariff neutral entries. Notably, GUJS has no long-term gas supply contract with Reliance Refinery.

f The Company does not expect any downward revision in gas pipeline tariff, which might take place post consideration of capex, opex, and reduction in transmission volume by the PNGRB.

Key Risks f Lower-than-expected gas consumption by power, fertiliser and CGD companies to

affect overall transmission volume.

f Reduction in gas pipeline tariffs by the PNGRB to drag earnings.

f Delay in commissioning of upcoming LNG terminals (Swan and Chhara).

Executive Summary

Management Meet – Key Takeaways

4

f Swan LNG Terminal to be Ready by Mar’21 – Opportunity for GUJS Pipeline: This terminal was expected to be commissioned by 2HFY21, but financial closure took more time, which delayed the project. As the financial closure is completed now, the terminal is expected to be ready by Mar’21. Notably, this terminal is ~45% mechanically complete as of now. Swan LNG terminal is a tolling terminal for LNG re-gasification. LNG re-gasification agreements have been executed for 4.5MMTPA capacity (90% of total capacity) for 20 years with GSPCL (1.5MMTPA) and BPCL, IOCL and ONGC (1MMTPA each). LNG terminal will get connected through GUJS pipelines before commissioning. The Company sees ample demand for LNG all over India. As the industry is supply-driven, LNG/gas consumption will increase once the infrastructure is ready. IIFCO, which has equity stake in Swan Energy, is looking forward to dedicated LNG re-gasification facility for its plants.

f Gas Demand from Power Sector: After commissioning of Swan LNG terminal, gas is likely to be transmitted to GSPC-owned Pipavav power plant, which is currently running at a very low PLF (Power Load Factor). Torrent Power-owned “DGEN” mega CCPP (1,200MW) has started consumption of ~0.62mmscmd LNG through GUJS’ pipelines in Feb’20.

f Boost for Gas Demand from New Geographical Areas (GAs) in Gujarat: In the 9th CGD round, the PNGRB allocated 9 geographical areas (GAs) of Gujarat for CGD business, taking the total GAs for CGD business to >7 companies in the state. As per the new guideline, the CGD companies have to complete a minimum work programme to supply CNG and PNG to consumer within stipulated period of time, which will create additional demand for gas.

Channel Check

5

Gujarat State Petronet GAIL

Investment View

BusinessIndia's 2nd largest gas transmission company, leader in gas transmission for Gujarat state.

India’s biggest gas transmission company, GAIL engaged in gas transmission and trading, Petrochemical & LPG production.

Growth story : In current situation of lower crude and gas price

GUJS is in better position as rise in gas demand in lower price environment; Company is only engaged in gas transmission. Fall in crude prices lead to decline in crude link LNG prices which improves LNG consumption and transmission.

Even rise in gas demand does not assure improvement in earnings of GAIL, as the company’s other businesses are linked to crude prices. Fall in crude prices is major risk to stock. In current scenario of Brent $25/bbl, Gas trading segment likely to post losses at EBIT level.

Subsidy risk Historically, GUJS has not shared any subsidy towards the petroleum products

GAIL has been asked by central Govt. to share subsidy burden of LPG when the crude prices were above $100/bbl.

Financials (Rs mn) FY20E FY21E FY22E FY23E FY20E FY21E FY22E FY23E

Net Revenues 23,653 24,936 26,884 29,360 6,86,688 7,03,620 6,62,094 6,85,029

EBITDA 15,924 16,526 17,932 19,744 91,592 99,891 1,04,985 1,05,310

Adjusted PAT 11,002 10,168 11,008 12,357 62,332 69,951 72,958 72,450

Growth (%)

Net Revenues 26.0 5.4 7.8 9.2 -9.9 2.5 -5.9 3.5

EBITDA 3.2 3.8 8.5 10.1 -5.3 9.1 5.1 0.3

Adjusted PAT 38.4 -7.6 8.3 12.2 7.9 12.2 4.3 -0.7

Margin (%)

EBITDA Margin (%) 67.3 66.3 66.7 67.2 13.3 14.2 15.9 15.4

Net Margin (%) 46.5 40.8 40.9 42.1 9.1 9.9 11.0 10.6

Per share (Rs)

EPS 19.5 18.0 19.5 21.9 13.8 15.5 16.2 16.1

Book Value 118.4 133.8 150.4 169.0 112.0 122.9 134.1 144.9

DPS 2.4 2.2 2.4 2.7 3.9 4.6 5.0 5.2

Valuation (X)

P/E 9.8 10.6 9.8 8.8 6.2 5.5 5.3 5.3

EV/EBITDA 7.3 6.9 6.2 5.0 4.8 4.9 4.2 4.1

P/BV 1.6 1.4 1.3 1.1 0.8 0.7 0.6 0.6

Return Ratio (%)

ROCE (%) 23.4 22.7 22.3 22.7 12.4 12.7 12.5 11.7

ROE (%) 16.5 13.5 13.0 13.0 12.3 12.6 12.1 11.1

Source: Company; RSec Research

Comparative Analysis

6

Key Charts

Exhibit 1: Power Sector Gas consumption to drive GUJS's transmission growth


Exhibit 2: Every 3mmscmd rise in gas transmission volume to improve FY21E net profit by 12%


Exhibit 3: Power Produced by Spot LNG and domestic gas is competitive with coal and other fuel

Source: CEA, PPAC, Bloomberg, RSec Research

Exhibit 4: Current Market price factoring only 54% of FY21 & 57% of FY22 net profit

Source: RSec Research Estimates

f >80% of Gujarat base power plant gas consumption is transmitted through GUJS pipelines

f Gas power plants continue to remain the main driver of GUJS’ transmission volume growth. We expect GUJS’ gas transmission volume to grow by 3-5mmscmd in the next 2-3 years owing to lower LNG prices, which will lead to 8-12% upside in GUJS’ transmission volume. This will translate into 7%/11%/12% growth in FY21E/FY22E/FY23E EPS respectively.

f GUJS volume remains robust given the demand from other sectors like CGD, fertilizer and small industries. In 3QFY20, GUJS reported a growth of 7.3% YoY in transmission volume.

f Based on our sensitivity analysis, every 3mmscmd rise in gas transmission volume to improve FY21E net profit by 12%.

f Revival of stranded gas power plants is likely on account of availability of spot LNG prices at 10 year low.

f At lower spot LNG prices, gas power plant can compete with coal and other fuels.

f Consensus 1-yr forward P/E multiple of 11.4x: It implies only 27mmscmd gas transmission volume in FY21E, while GUJS is likely to report 41 mmscmd of volume. It factors in only 54% of FY21E net profit.

f Consensus 2-yr forward P/E multiple of 10x: It implies only 30mmscmd gas transmission volume in FY22E, while GUJS is likely to report 44 mmscmd of volume. It factors in only 57% of FY22E net profit.

FY21E FY22E

Gujarat Gas Market Cap (Rs bn) 172.1 172.1

GUJGA's valuation for GUJS's holdings (40% holdco. disc.) 55.9 55.9

GUJS’s current market cap (Rs bn) 118.4 118.4

GUJS’s adjusted/standalone market cap (Rs bn) 62.5 62.5

Total Gas transmission volume (mmscmd) 27.0 30.0

GUJS’s adjusted/standalone earnings (Rs bn) 5.5 6.3

Implied Core P/E 11.4 10.0

Market Factor in net profit vs our estimates 54% 56%

Our Estimates of Net Profit (Rs bn) 10.2 11.0

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I. Gas-based Power Plants to Drive Gas Transmission VolumeGUJS is the life-line for the gas-based power plants in Gujarat, as >80% of their gas consumption is transmitted through the Company. Despite fall in domestic gas supplies to these power plants, imported LNG consumption increased by 82% during Jan’18-Jan’20 period owing to fall in spot LNG prices from US$8/mmbtu to US$3/mmbtu in last 1 year, as some private gas-based power plants have doubled their consumption of imported LNG. Gas-based power plants continue to remain the main driver of GUJS’ transmission volume growth (Exhibit 5). Hence, we expect GUJS’ gas transmission volume to grow by 3-5mmscmd in the next 2-3 years led by:

f Torrent Power has booked 4 LNG cargoes (~1mmscmd) for delivery in FY21E and revival plans of DGEN power plant (1,200MW capacity = ~4mmscmd at 85% PLF).

f ArcelorMittal to start Bhander captive power plant (gas-based) at 85% PLF, which will consume ~2mmscmd gas.

f Budgetary allocation of Rs10.35bn to de-stress stranded gas power plants.

f Fall in APM gas prices to US$2.4/mmbtu will make gas power competitive with coal and other renewable.

f Proposal to procure 4,000MW of gas-based power by the Power Ministry (2,000MW for blending with solar power and 2,000MW through programme like Power System Development Fund (PSDF)).

Conservatively, we expect the gas-based power plans to consume 3-5mmscmd more in the next 2-3 years owing to lower LNG prices, which will lead to 8-12% upside in GUJS’ transmission volume. This will translate into 7%/11%/12% growth in FY21E/FY22E/FY23E EPS respectively. Our model suggests, every 3mmscmd growth in gas transmission volume leads to 12% growth in FY21E EPS (Exhibit 6).

Exhibit 5: Power Sector Gas consumption to drive GUJS’s transmission growth


Source: Company; RSec Research Source: RSec Research

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Investment Rationale

Our investment thesis is based on the following premises:

Gas-based Power Plants to Drive Gas Transmission Volume.Fertiliser Plant & GSPC’s Cargoes to Drive 10% Volume Growth. New Pipeline to Evacuate LNG from Upcoming Terminals in Gujarat.

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Gas Power Plants Running on Imported LNG: Power consumption is function linked to improvement in country’s IIP (Exhibit 7-8). Gas power generation has been contributing an average 12.5% during 2016-till date to in Gujarat’s total power generation (Exhibit 9). However, in recent month, fall in overall power demand led to drop in gas power generation to only 6.5% in Jan’20. Total domestic gas allocated to Gujarat’s power plants declined sharply to 1mmscmd in Jan’20 from 3mmscmd in Jan’18 (Exhibit 10), while the consumption of imported gas by the power plants increased to 4.69mmscmd in Jan’20 from 2.58mmscmd in Jan’19 (Exhibit 13).Further, the private gas-based power producers in Gujarat doubled their spot LNG consumption, as spot LNG prices corrected from US$8/mmbtu in Jan’19 to US$3/mmbtu in Jan’20.

GUJS transmitted 80% of total gas consumed by Gujarat’s gas--based power plants in 3QFY20 (Exhibit 14). However, the gas transmission volume to power plants is just 17% of its total gas transmission portfolio (Exhibit 16). GUJS is well-connected to most state gas power plants, which are likely start consuming spot LNG more. Consumption by the private gas power plants is likely to jump on softer spot LNG prices and likely to lead in improvement of GUJS’ transmission volume.

Exhibit 7: India’s IIP fall since May’19, any recovery will lead to improvement in power demand

Exhibit 8: A fall in India’s IIP data led to decline in India power consumption or demand

Source: Ministry of Finance; RSec Research Source: Ministry of Power; RSec Research

Exhibit 9: Fuel wise power generation break up (Gas power generation contributing an average 12.5% during 2016 till date in Gujarat)

Exhibit 10: Domestic gas supply to Gujarat base power plants declined sharply to 1 mmscmd

Source: Ministry of Power, CEA, RSec Research Source: Ministry of Power, CEA, RSec Research

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Exhibit 11: Central Govt owned Gujarat base power plants consume spot LNG very miniscule but in future scope of improvement on lower spot LNG prices and Govt assistance

Exhibit 12: Gujarat State Owned power plants consumption of spot & long term LNG likely to improve

Source: Ministry of Power, CEA, RSec Research Source: Ministry of Power, CEA, RSec Research

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Jul-19

Au

g-1

9

Se

p-1

9

Oct

-19

No

v-19

De

c-19

Jan

-20

mmscmd

GANDHAR CCPP - Long GANDHAR CCPP - Spot KAWAS CCPP - Long KAWAS CCPP -Spot

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Jan

-18

Fe

b-1

8

Ma

r-18

Ap

r-18

Ma

y-1

8

Jun

-18

Jul-18

Au

g-1

8

Se

p-1

8

Oct-

18

No

v-1

8

De

c-1

8

Jan

-19

Fe

b-1

9

Ma

r-19

Ap

r-19

Ma

y-1

9

Jun

-19

Jul-19

Au

g-1

9

Se

p-1

9

Oct-

19

No

v-1

9

De

c-1

9

Jan

-20

mmscmd

PIPAVAV CCPP - Long PIPAVAV CCPP - Spot DHUVARAN CCPP - Long DHUVARAN CCPP - Spot UTRAN CCPP - Long

UTRAN CCPP - Spot HAZIRA CCPP - Long HAZIRA CCPP - Spot HAZIRA CCPP EXT - Long HAZIRA CCPP EXT - Spot

Exhibit 15: Power sector consume 15% to 20% of the total gas available in India

Exhibit 16: GUJS’s ~ 17% of the total gas volume transmission to power sector

Source: PPAC; RSec Research Source: Company, RSec Research

Exhibit 13: Gujarat base private power plants are the major consumer of spot and term LNG, which will likely to improve (mmscmd)

Exhibit 14: GUJS Gas transmission volume to power sector, reached to new high of 5.9mmscmd in 3QFY20 from low 3mmscmd in 4QFY19

Source: Ministry of Power, CEA, RSec Research Source: Company, RSec Research

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Q1FY19 Q2FY19 Q2FY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20

mmscmd

0

20

40

60

80

100

120

140

160

180

200

4QFY

16

1QFY

17

2QFY

17

3QFY

17

4QFY

17

1QFY

18

2QFY

18

3QFY

18

4QFY

18

1QFY

19

2QFY

19

3QFY

19

4QFY

19

1QFY

20

2QFY

20

3QFY

20

4QFY

20

mmscmd

Fertilizer Power City Gas Industrial Petchem/Ref/ LPG Other

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

Q1FY19 Q2FY19 Q2FY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20

mmscmd

CGD Refinery Fertilizer Power Others

10

Gujarat – one of the largest electricity markets in India – witnesses high demand for electricity during Apr-Jun and Oct-Dec, while demand remains low during monsoon (Jul-Sept). Whilst the state possesses 30% of India’s gas-fired power capacity (Exhibit 17-18), its gas-fired capacity operated at a low utilisation factor of 22.3% during FY18/19, in line with India’s overall gas-fired fleet. Gujarat’s gas-based gas power plants have entered into Power Purchase Agreement (PPA) with State Electricity Boards (SEBs) at price range of Rs2.8 to Rs4.2/Kwh. In order to honour the PPA, gas-based power plants need spot LNG prices at <US$4/mmbtu. We believe the sustained low spot LNG prices augurs well for the Gujarat’s gas-based gas power plants, which are well connected to short distance LNG terminals through GUJS’s pipelines (Exhibit 19)

Exhibit 17: Gujarat State holds 30% of India’s total Gas power plant capacity

Exhibit 18: Gas power plant capacity is 29% of the total Gujarat Power plant capacity

Source: CEA; RSec Research Source: CEA; Company, RSec Research

Gas power capacity in GUJ, 29%

Other Fuel Power capacity in GUJ, 71%

Gujarat's Gas Power plant

capacity, 30%

Rest of India's Gas power plant

capacity, 70%

Exhibit 19: GUJS is well connected to all Gujarat LNG import terminals and building pipeline for Swan and Chhara, LNG import capacity at Gujarat state to increase by 40% in next 4 years (FY20- FY24)

Source: PPAC, Company, Reliance Securities Research estimates

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY23E FY24E

mmtpa

Dahej Hajira Mundra Swan - Jafrabad Chhara Dahej III B

11

Revival of Gas Power Plants is Likely: Torrent Power has tied-up for 4 LNG cargoes below US$4/mmbtu. As per the Company, power produced at this price is competitive with the coal-based power. Sustained lower spot LNG prices scenario is the opportunity for the DGEN (1,200MW) gas power plant to become operational and in case the plant operates at 85% PLF, it will consume 4.5mmscmd gas. Besides, SUGEN (1,148MW) plant consumed 2.79mmscmd gas in Dec’19 at 48% PLF level, which can touch 85% PLF with additional consumption of 1.85mmscmd (Exhibit 20). SUGEN plant consumed ~3.5mmscmd of spot LNG in May’19, while the spot prices averaged at ~US$5.1/mmbtu. Currently, the spot LNG prices are at 10-year low (~$3/mmbtu) (Exhibit 21), which makes a strong case for higher consumption of spot LNG by SUGEN and DGEN power plants. In case both plants run at 85% PLF level, they can consume ~6mmscmd of spot LNG.

Exhibit 20: Torrent Power Plant Gas consumption (SUGEN Unit) Exhibit 21: Spot LNG Price at multi year low of $3 mmbtu

Source: CEA; RSec Research Source: Company, RSec Research

1.50

2.00

2.50

3.00

3.50

4.00

4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20

mmscmd

SPOT LNG LONG TERM LNG

2468

10121416182022

Jul-1

0

Jan-

11Ju

l-11

Jan-

12Ju

l-12

Jan-

13Ju

l-13

Jan-

14Ju

l-14

Jan-

15Ju

l-15

Jan-

16Ju

l-16

Jan-

17Ju

l-17

Jan-

18Ju

l-18

Jan-

19Ju

l-19

Jan-

20

$/mmbtu

12

Captive Power Plant to Consume ~2mmscmd of Volume: ArcelorMittal Nippon Steel India (AMNS India) has acquired Bhander power plant at Hazira from Asset Reconstruction Company. Bhander is a natural gas-based plant with an installed capacity of 500MW and will be captive to AMNS India’s steel manufacturing operations at Hazira. The plant will likely to operate at 85% PLF in FY21. It will consume ~2mmscmd of gas, transmitted through GUJS’ pipelines. We believe GUJS’ transmission volume to improve by 2mmscmd in case the plant starts operations at 85% PLF. Addition of 2mmscmd volume could improve GUJS’ transmission volume by ~5% YoY.

De-stressing Gas-based Power Plants: The Government had set up PSDF for 2 years (FY16 & FY17) to subsidise the power generated by the stranded gas power plants. However, global LNG prices increased during same period, which made gas-based power uncompetitive to that of coal-based power. Currently, the global LNG prices are at 10-year low (US$3/mmbtu). In the last Union Budget, the Government allocated Rs10.35bn to resume operations at these stranded power plants. Based on the information available on “MERIT”, average power tariff in Gujarat ranges between Rs2.5-3.25/Kwh (variable cost) (Exhibit 23), while the marginal cost ranges between Rs4.95-7.2/kwh for most days (variable cost) (Exhibit 22). As the prices of spot LNG at multi-year low, allowing VAT concessions/waiver and cuts marketing margin (by 75%) on imported LNG, seems to be workable options for the government.

Exhibit 22: Gujarat state marginal power tariff range between Rs 4.9 to 7.2/KWh (April 20)

Exhibit 23: Gujarat state average power tariff range between Rs 2.5 to 3.25/KWh (April 20)

Source: CEA, Merit, RSec Research Source: CEA, Merit, RSec Research

However, at spot LNG price of US$3/mmbtu (corresponding to US$3/mmbtu delivered including re-gas, transportation charges and variable cost) Rs3/kwh seems to be achievable. (Exhibit 24). Assuming an 8% slope to Brent, the imported LNG price of US$3/mmbtu is workable option for the gas-based power plants. The Company has guided that $3/mmbtu would be workable options for the Gujarat’s gas-based gas power plants.

13

Exhibit 26: Power Sector consume 30% of India’s domestic gas sale Exhibit 27: Power Sector LNG consumption share improved from 10% to 12% from FY19 to FY20TD (in overall India’s LNG basket)

Source: PPAC, Bloomberg, RSec Research Source: PPAC, Bloomberg, RSec Research

India’s Power Sector – 2nd Largest Gas Consumer: In FY20 YTD, India’s power sector consumed 30% of domestic gas and 12% imported LNG (Exhibit no. 26-27). On overall basis, power sector is the 2nd largest consumer of natural gas in India (Exhibit 15). About 13.4GW (out of 25GW) of stranded gas power plants can be made operational at lower gas price. While the gas requirement for 13.4GW capacity at 65% PLF is ~27mmscmd, domestic gas production stands at 87mmscmd and supply was lower at 25mmscmd in FY19, which has fallen further to 21mmscmd in 9MFY20. (Exhibit 27). Historically, it is evident that lower LNG prices boosted LNG consumption by the gas-based power plants, subject to improvement in power demand.

Exhibit 24: Power Produced by Spot LNG and domestic gas is competitive with Coal and other fuel

Exhibit 25: Gas based Power plant utilization (Power Load Factor) (%)

Source: CEA, PPAC, Bloomberg, RSec Research Source: CEA, RSec Research

15.0 17.0 19.0 21.0 23.0 25.0 27.0 29.0 31.0 33.0

Jan-

14

Ma

y-14

Sep

-14

Jan-

15

Ma

y-15

Sep

-15

Jan-

16

Ma

y-16

Sep

-16

Jan-

17

Ma

y-17

Sep

-17

Jan-

18

Ma

y-18

Sep

-18

Jan-

19

Ma

y-19

Sep

-19

Jan-

20

% PLF

0

10

20

30

40

50

60

70

80

Jan'

16M

ar'16

May

'16Ju

l'16

Sep'

16N

ov'16

Jan'

17M

ar'17

May

'17Ju

l'17

Sep'

17N

ov'17

Jan'

18M

ar'18

May

'18Ju

l'18

Sep'

18N

ov'18

Jan'

19M

ar'19

May

'19Ju

l'19

Sept

'19N

ov'19

Jan'

20

mmscmd

Fertilizer Power City Gas Others

0102030405060708090

100

Jan'

16M

ar'1

6M

ay'

16Ju

l'16

Sep

'16N

ov'16

Jan'

17M

ar'1

7M

ay'

17Ju

l'17

Sep

'17N

ov'17

Jan'

18M

ar'1

8M

ay'

18Ju

l'18

Sep

'18N

ov'18

Jan'

19M

ar'1

9M

ay'

19Ju

l'19

Sep

t'19

Nov

'19Ja

n'20

mmscmd

Fertilizer Power City Gas Others

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Domestic gas



US HH

Rs/kwh


14

Exhibit 28: Domestic Gas price at 10 year low Exhibit 29: Power Produced by Spot LNG and domestic gas is competitive with coal and other fuel

Source: PPAC, RSec Research Source: Company, RSec Research

Fall in APM Gas Prices for 1HFY21 – Augurs Well for Gas-based Power Plants: APM gas prices have been downwardly revised to US$2.4/mmbtu for 1HFY21 from US$3.23/mmbtu. (Exhibit 28). Including transportation and state levies, the delivered price would range between US$ 3.2-3.5/mmbtu. This translates into a variable cost of Rs2.0-2.25/kwh, which along with the fixed cost of ~Re1/kwh works out to a total cost of ~Rs3.0-3.25/kwh (Exhibit 29). In comparison, the cost of domestic coal-based power ranges between Rs2.4-3/kwh, while new solar power plants offer Rs2.5-2.8/kwh. We expect fall in domestic gas prices to make gas power plants competitive with that of coal-based and renewable power.

Power Ministry’s Proposal to Drive Demand: The Union Power Ministry has proposed to procure 4,000MW of gas-based power (2,000MW for blending with solar power and 2,000MW through PSDF-like programme) and asked Power Trading Corporation of India (PTC India) to work on the proposal. We believe the solar blending requirement will be a three-year programme to start with, while the PSDF-like procurement is likely to be an annual feature depending on the annual budgetary support. In a scenario where delivered gas prices are likely to fall, this proposal, if implemented, can boost the gas demand for the power sector by 18mmscmd. The gas is proposed to be imported by GAIL India and GUJS with concessions and haircuts by the central/state governments, power companies and gas transporters in order to make it affordable.

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Domestic gas



US HH

Rs/kwh


2.2 2.1

4.34.7

5.14.7

3.83.1

2.5 2.52.9 3.1 3.4 3.7

3.22.4

-

1.0

2.0

3.0

4.0

5.0

6.0

FY09

FY10

FY11

FY12

-Nov

'14

Nov

'14-M

ar'1

5

1HFY

16

2HFY

16

1HFY

17

2HFY

17

1HFY

18

2HFY

18

1HFY

19

2HFY

19

1HFY

20

2HFY

20

1HFY

21

$/mmbtu

15

II. Fertilizer Plant & GSPC’s Cargoes to Drive 10% Volume UpsideRamagundam fertiliser plant, which is likely to start operation from May’20, is expected to consume ~2mmscmd gas. Under the agreement of 20 years, GUJS will transmit the gas to the plant through Mallavaram-Ramgundam pipeline. As per our calculation, 2mmscmd incremental volume growth will increase GUJS’ total gas transmission volume by 5% (Exhibit 30). As of now, GSPC has purchased 7 cargoes (each capacity of ~0.25mmscmd) with total volume of ~2mmscmd at a price <US$3/mmbtu. This LNG volume will likely to be transmitted through GUJS’ pipelines, which would be a ~5% volume growth in FY21E. However, GSPC is still exploring new LNG cargoes at lower LNG prices. We can expect more LNG cargoes in case the spot LNG prices fall below to US$3/mmbtu. In total we expect the contracted volume of the fertiliser plants and GSPC to improve GUJS’ gas transmission volume by 10% in FY21E.

Exhibit 30: Ramagundam Fertiliser plant to start consuming 2 mmscmd of gas by May’20

Ramagundam fertilizers and chemicals Limited Details

Expected to be commission May'20

Urea Production capacity 3850 MTPD

Gas requirement ~2mmscmd

Pipeline connection (GUJS) Mallavaram to Ramagundam

Gas Sources GAIL IndiaSource: Ministry of Fertilser, Company, RSec Research

GSPC’s Search for <US$3/mmbtu Cargoes Continues; Booked 7 Cargoes for Next One Year: As of now, GSPC has purchased 7 cargoes (each capacity of ~0.25mmscmd) with total volume of ~2mmscmd, to be transmitted through GUJS’s pipelines, which would drive ~5% volume growth in FY21E (Exhibit 31). GSPC bought 1 March cargo at ~US$2/mmbtu, 2 April cargoes between US$2.5/mmbtu-US$2/mmbtu, 2 May 9-11 cargo at US$2.7-2.75/mmtbu and 2 Jun 3-5 cargo at US$2.85-2.9/mmbtu. This implies the demand of LNG at lower price is rising. India has taken advantage to procure cheap cargoes and ended up with a record 42 deliveries. We believe Indian LNG buyers continue to probe for more cargoes, while counter seasonal buyers may start to enter into the market little early (Exhibit 32).

Exhibit 31: Average Price of GSPC’s booked cargo is $2.5/mmbtu, GSPC has booked 7 cargo’s for delivery in FY21

Exhibit 32: India’s LNG import in Feb’20 was at all time high, GUJS to be beneficiary of it

Source: Reuters, RSec Research Source: PPAC, RSec Research

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Mar'20 Apr'20 Apr'20 May'20 May'20 Jun'20 Jun'20

$/mmbtu

0

20

40

60

80

100

120

140

Ap

r-16

Jun-

16A

ug-1

6O

ct-1

6D

ec-1

6Fe

b-1

7A

pr-

17Ju

n-17

Aug

-17

Oct

-17

Dec

-17

Feb

-18

Ap

r-18

Jun-

18A

ug-1

8O

ct-1

8D

ec-1

8Fe

b-1

9A

pr-

19Ju

n-19

Aug

-19

Oct

-19

Dec

-19

Feb

-20

mmscmd

16

Exhibit 33: Swan Energy LNG terminal likely to be ready by Mar’21…4 companies agreed to offload LNG (~17 mmscmd)

Exhibit 34: GUJS pipeline network connected to all existing LNG terminal in Gujarat

Source: Swan Energy Annual report, RSec Research Source: Company, RSec Research

III. New Pipeline to Evacuate LNG from Upcoming Terminals in Gujarat Gujarat – which is home to 27.5MMTPA of LNG imports – is likely to add another 5MMTPA capacity in FY22E (Swan - Jafrabad) and another 5MMTPA capacity in FY24E (Charra-HPCL). Recently, Mundra LNG terminal has started evacuating gas through Anjar-Mundra pipeline connecting to gas consumer hub at Morbi (Gujarat). Further, we see floating LNG terminal at Jafrabad to start over the next 2 years and HPCL’s Chhara by 2023-end. As per the management, GUJS is positioning itself to take advantage of surge in gas supplies from these new LNG terminals based on the investments towards connecting pipelines to these facilities and expanding the high pressure gas grid capacity from the current 43mmscmd to an estimated 50-53mmscmd (Exhibit 34). The Company is also planning to create a link to Jafrabad LNG terminal of Swan Energy. Further, the Company is also likely to invest in connecting the gas grid with Chhara LNG terminal in future. We are more bullish on volume growth from the LNG terminal of Swan Energy (off-takers contracted for 90% of the volume), which will be operate at minimum 10% utilisation level from FY22E onwards (Exhibit 33).

Petcoke Gasifier Not a Threat to GUJS’ Volume: Petcoke gasifier is RoCE-dilutive at crude @US$40/bbl mainly due to soft spot LNG prices. Project could generate only 2% RoCE (Exhibit 36), which is dilutive to the existing RoCE of the Company (11%). Based crude price at US$40/bbl level, the project will deliver only 2% RoCE in FY21E at 90% utilisation level (Exhibit 35). We still believe the global LNG glut to sustain with the second wave of LNG export terminals, which is likely to get operational in 2021.

Exhibit 35: Petcoke Gasifier project - ROCE dillutive for parent co. Exhibit 36: Saving dynamics and ROCE ( less than 2%)

Details Unit FY21E Unit FY21E

Brent Price $/bbl 40.00 Cost of PetcokeLNG Delivered Price $/mmbtu 4.39 Petcoke: Refinery Rs/Ton 4,514 Petcoke Prices: US$/Ton 60.19 Petcoke: Purchase Rs/Ton 2,633 Petcoke Prices US$/mmbtu 1.79 Total Cost of Petcoke US$ Mn 479 Spread of LNG-Petcoke US$/mmbtu 1.01

Cost of Syngas US$/mmbtu 2.9No of Gasifiers 10 Total cost of LNG @ 20 mmscmd 1136.5Syngas/Gasifier mmscmd 2 Petcoke Cost US$ Mn 479.0Petcoke Required/Gasifier Mt ton 0.9 Variable Costs (petcoke to Syngas) US$ Mn 227.3Syngas Produced mmscmd 20 Total Petcoke gasifier cost US$ Mn 706.3

EBITDA for Petcoke gasifier 430 Depreciation 320 EBIT 110 ROCE 1.6%Capex $mn 7,000


1.5

1.0 1.0 1.0

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

GSPL BPCL IOCL ONGC

MMTPA

17

Update on Pipeline Projects Mehsana-Bhatinda Pipeline – 48% Completed: At current speed up to ~3-4km/day, 440km pipeline is completed till FY19-end and another 218km completed during 9MFY20. The pipeline is expected to be completed by Dec’20. In FY19, GUJS commissioned 440km pipeline in (i) Palanpur-Pali; (ii) Barmer-Pali; and (iii) Jalandhar-Amritsar sections of the Mehsana-Bhatinda-Jammu pipeline project. GSPL India Gasnet (GIGL) commissioned 440km pipeline of Mehsana-Bhatinda Pipeline (MBPL) network and gas is being transported from Vedanta’s gas field in Rajasthan through GIGL’s network. Gas is also being transported to Amritsar CGD network through Jalandhar-Amritsar section of MBPL. The Company has incurred Rs13bn capex in Phase-I, while Rs48bn is being spent in Phase-II.

GITL’s Project on Hold Except 363km East Godavari-Ramangundam Section: GSPL India Transco (GITL) has been created to lay the Mallavaram-Bhopal-Bhilwara- Vijaipur Pipeline (MBBVPL -1,881km) awarded by the PNGRB on competitive bidding. As per the Company, Phase-I of the 363km pipeline between East Godavari and Ramagundam (to revive FCI’s troubled urea project) has been completed. GITL is ready to transport the contracted 2mmscmd gas once the Ramagundam unit is ready to receive the gas.

As per the Management, other larger sections of MBBVPL won by GITL are on hold due to pending assessment of project viability.

As the potential volume appears to be modest at just 2mmsmcd – just 5% on GUJS’ current volume – the impact of GITL’s earnings or DCF value of GUJS’ 52% stake in GITL is unlikely to be significant. Hence, we have chosen to value GUJS’ stake in GITL at cost - Rs1.98bn or ~Rs3.5/share impact on GUJS’s Target Price.

18

Valuation 1-Yr Fwd P/E Multiple of 11.4x and 2-Yr Fwd P/E Multiple of 10.0x

f Consensus 1-yr forward P/E multiple of 11.4x: It implies only 27mmscmd gas transmission volume in FY21E (Exhibit 37), while GUJS is likely to report 41mmscmd of volume. It factors in only 54% of FY21E net profit.

f Consensus 2-yr forward P/E multiple of 10.0x: It implies only 30mmscmd gas transmission volume in FY22E (see Exhibit 37), while GUJS is likely to report 44mmscmd of volume. It factors in only 56% of FY22E net profit.

The market has also factored in ~6% fall in gas transmission tariff for high pressure and low pressure pipeline. (Exhibit 38)

Pure Play on Weak LNG Prices; 44% Upside to CMP: We expect GUJS’s gas transmission volume to clock 8.3% CAGR, while its revenue and net profit to witness 12% and 14% CAGR, through FY19-23E (Exhibit 39,40,41). As the outlook on spot LNG prices is subdued, we believe it can lead to positive surprises on volume front and thereby support GUJS’ core transmission earnings. Further, the earnings growth of CGD subsidiary, Gujarat Gas (GUJGA), will get a boost, as 75-80% of its volume comes from industrial customers, whose gas requirements are met through LNG sourcing. Resultantly, GUJS is a play on weak LNG prices and growth in the CGD sector. We arrive at DCF-based 2-yr Target Price of Rs286 valuing core assets at Rs142 and investment at Rs144 (ref:DCF Table page no 20).

Robust FCF: Capex required for the remaining portion of the gas pipeline project is likely end by FY21E. Despite higher capex, we expect GUJS to generate a strong FCF to the tune of Rs18.5bn over FY20-FY23E (Exhibit 42). We have considered Rs40bn capex for the next 3 years for the pipeline projects.

Set to Become Debt-free by FY23E: Adjusted net debt to equity ratio is expected to fall 0.2x in FY20E vs. 0.3x in FY19 (Exhibit 43-44). The Company is likely to become net debt free by FY23E on the back of strong operating cash flow. Its net debt is pegged at Rs11.8bn at Dec’19.

Return Ratio: Over the past four years, its RoCE/RoE have improved by 814/581bps and likely to remain at 23%/13%, respectively till FY22E (Exhibit 45).

Exihibit 37: Current Market price factoring only 54% of FY21 & 56% of FY22 net profit

FY21E FY22E

Gujarat Gas Market Cap (Rs bn) 172.1 172.1

GUJGA's valuation for GUJS's holdings (40% holdco. disc.) 55.9 55.9

GUJS’s current market cap (Rs bn) 118.4 118.4

GUJS’s adjusted/standalone market cap (Rs bn) 62.5 62.5

Total Gas transmission volume (mmscmd) 27.0 30.0

GUJS’s adjusted/standalone earnings (Rs bn) 5.5 6.3

Implied Core P/E 11.4 10.0

Market Factor in net profit vs our estimates 54% 56%

Our Estimates of Net Profit (Rs bn) 10.2 11.0

Source: R-Sec research estimates

19

Exhibit 38: GUJS’s Gas pipeline tariffs unlikely to take major hit in PNGRB revision

Exhibit 39: GUJS’s gas transmission volume CAGR of 8.3% over FY19-FY23E

Source: Company, RSec Research Source: Company, RSec Research

Exhibit 40: GUJS’s net revenue CAGR of 12% over FY19 to FY23E Exhibit 41: GUJS’s Net profit expected to be CAGR of 14% over FY19 to FY23E


Exhibit 42: GUJS’s FCF would be strong, likely to generate Rs 18.5bn in next 3 years

Exhibit 43: GUJS total debt likely to be re-paid by FY23E (Net debt to equity


0

200

400

600

800

1000

1200

1400

1600

1800


Rs/tcm

0

10

20

30

40

50

60

FY17

FY18

FY19

FY20

E

FY21

E

FY22

E

FY23

E

mmscmd

Power Refinery CGD Fertilizers Steel Others

0

5000

10000

15000

20000

25000

30000

35000

FY17

FY18

FY19

FY20

E

FY21

E

FY22

E

FY23

E

Rs mn

0

2000

4000

6000

8000

10000

12000

14000FY

17

FY18

FY19

FY20

E

FY21

E

FY22

E

FY23

E

Rs mn

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

FY16 FY17 FY18 FY19 FY20E FY21E FY22E

Rs mn

(0.10)

(0.05)

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

FY18 FY19 FY20E FY21E FY22E FY23E

20

Exhibit 44: GUJS likely to become net cash company by FY23E Exhibit 45: GUJS- Stable ROCE and ROE at 23% and 13% respectively


Exhibit 46: GUJS is trading at 1.2x of FY22E book value (discount to long term avg. of 1.5X)...Price to book value



Exhibit 48: 1 yr. forward Best PE ratio (consensus) Exhibit 49: 1 Yr. forward Best EV to Bets EBITDA (consensus)


(10000)

(5000)

0

5000

10000

15000

20000

25000

FY18

FY19

FY20

E

FY21

E

FY22

E

FY23

E

Rs mn

0%

5%

10%

15%

20%

25%

30%


RoCE RoE

0.0

0.5

1.0

1.5

2.0

2.5

FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY23E

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

27 30 33 36 39 41(Base) 45

Rs mn


7.0

9.0

11.0

13.0

15.0

17.0

19.0

Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Apr-20

BEST P/E Average +1 STDEV -1 STDEV

5

6

7

8

9

10

11

12

Apr-15 Apr-16 Apr-17 Apr-18 Apr-19

BEST EV TO BEST EBITDA Average +1 STDEV -1 STDEV

21

GUJS DCF Valuation and WACC Caluculations & Terminal Growth Rate

Parameters

Risk free rate 7%

Market risk Premium 5%

Beta of the Stock 1.0

Cost of equity 12%

Terminal Growth Rate 0%

(Rs mn) FY20E FY21E FY22E FY23E FY24E FY25E FY26E FY27E FY28E FY29E FY30E

PAT 11,002 10,168 11,008 12,357 12,464 12,417 12,388 12,356 12,322 12,285 12,274

Dep 1,981 2,749 3,224 3,362 3,500 3,638 3,776 3,914 4,052 4,190 4,328

+/- Change in WC 4,589 774 1,175 1,494 134 - - - - - -

+/- Capex (11,000) (11,000) (11,000) (3,200) (3,200) (3,200) (3,200) (3,200) (3,200) (3,200) (3,200)

+ / - Change in debt (2,700) (2,700) (2,500) (2,000) - - - - - - -

FCFE 3,872 (9) 1,907 12,012 12,898 12,855 12,964 13,070 13,174 13,276 13,402

Year - 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0

Disc FCFE 3,872 (8) 1,520 8,550 8,197 7,294 6,568 5,912 5,321 4,787 4,315

DCF Mar'20 Mar'21 Mar'22 Mar'23

Cost of Equity 12% 12% 12% 12%

NPV - Continuing Business 56,305 58,726 65,783 71,541

NPV - Terminal Value 11,560 12,947 14,501 16,241

Equity Value 67,866 71,673 80,284 87,782

Equity Value/share 120 127 142 156

# Shares (mn) 564

Gujarat Gas stake 54.16% stake valued at 20% discount to CMP 139 139 139 139

Sabarmati Gas stake (27.47%) 27.47% stake; valued at 4x of book value 4.78 4.78 4.78 4.78

Wind Mill Valued on investments

Total Value of Share 263 271 286 299


22

Profit & Loss Statement

Y/E Mar (Rs mn) FY19 FY20E FY21E FY22E FY23E

Revenues 18,773 23,653 24,936 26,884 29,360

Expenses

Gas Transmission expense (1,018) (5,182) (5,736) (6,145) (6,669)

Purchases of stock-in-trade

(Inc)/Dec in inventories

Employee benefits expense (645) (616) (647) (679) (713)

Other expenses (1,683) (1,930) (2,027) (2,128) (2,235)

EBITDA 15,426 15,924 16,526 17,932 19,744

EBITDA margins 82% 67% 66% 67% 67%

Growth (%) 34% 3% 4% 9% 10%

DDA (1,800) (1,981) (2,749) (3,224) (3,362)

EBIT 13,626 13,943 13,777 14,708 16,382

Other income 594 634 907 882 894

Finance cost (2,192) (1,682) (688) (438) (268)

PBT 12,028 12,895 13,996 15,153 17,009

Tax (4,081) (1,893) (3,828) (4,144) (4,652)

PAT 7,947 11,002 10,168 11,008 12,357

Net Profit margins 42.3% 46.5% 40.8% 40.9% 42.1%

Growth (%) 18.9% 38.4% (7.6%) 8.3% 12.2%

EPS 14.1 19.5 18.0 19.5 21.9

Balance Sheet Statement


Shareholder's funds 57,440 66,798 75,446 84,809 95,319

Share capital 5,640 5,640 5,640 5,640 5,640

Reserves and surplus 51,800 61,158 69,806 79,169 89,679

Non-current liabilities 18,728 14,784 12,390 10,220 8,591

LT borrowings 13,048 10,348 7,648 5,148 3,148

DTL (Net) 5,226 3,982 4,287 4,618 4,989

Other LT liabilities 266 266 266 266 266

LT provisions 189 189 189 189 189

Current liabilities 13,331 19,652 20,718 22,337 24,394

Trade payables 13,304 19,613 20,677 22,292 24,345

ST provisions 27 39 41 45 49

Total Liabilties 89,500 1,01,234 1,08,554 1,17,366 1,28,304

Non current asset 84,264 93,283 1,01,534 1,09,310 1,09,148

Fixed assets 34,574 43,593 51,844 59,620 59,458

Intangible assets 1,501 1,501 1,501 1,501 1,501

Capital work-in-progress 4,194 4,194 4,194 4,194 4,194

Non-current investments 42,772 42,772 42,772 42,772 42,772

LT loans and advances 279 279 279 279 279

Other non-current assets 945 945 945 945 945

Current assets 5,236 7,952 7,020 8,056 19,156

Inventories 1,279 1,886 1,988 2,143 2,341

Trade receivables 2,081 3,068 3,234 3,487 3,808

Cash and cash equivalents 1,583 2,567 1,343 1,935 12,472

ST loans and advances 15 23 24 26 28

Other current assets 278 409 432 465 508

Total Asset 89,500 1,01,234 1,08,554 1,17,366 1,28,304

23

Cash Flow Statement


PAT (Reported) 7,947 11,002 10,168 11,008 12,357

Non-Cash Charges 2,062 737 3,054 3,554 3,733

Other Income (594) (634) (907) (882) (894)

Operating Cash flow before WC change 9,416 11,105 12,315 13,680 15,195

Inventories (44) (606) (102) (155) (197)

Sundry debtors (846) (987) (166) (253) (321)

Loans and advances (0) (7) (1) (2) (2)

Other current assets (100) (132) (22) (34) (43)

Other current liabilities (2,515) 6,308 1,064 1,615 2,053

Provisions 16 13 2 3 4

Working Capital Inflow / (Outflow) (3,489) 4,589 774 1,175 1,494

Net cash flow from operating activities 5,926 15,694 13,089 14,855 16,689

Purchase of fixed assets (1,878) (11,000) (11,000) (11,000) (3,200)

Sale of Investments (958) - - - -

Others 594 634 907 882 894

Net cash flow from Investing activities (2,242) (10,366) (10,093) (10,118) (2,306)

Issue of share capital during year 1 - - - -

Proceeds from fresh borrowings (4,697) (2,700) (2,700) (2,500) (2,000)

Dividend paid including tax (1,128) (1,644) (1,520) (1,645) (1,847)

Net cash flow from financing activities (5,824) (4,344) (4,220) (4,145) (3,847)

Total Increase/(decrease) in cash (2,140) 984 (1,224) 592 10,536

Opening cash & bank balance 3535.5 1395.4 2566.6 1343.0 1935.4

Closing cash & bank balance 1,395.4 2,379.0 1,343.0 1,935.4 12,471.6

Key Ratios

Y/E Mar FY19 FY20E FY21E FY22E FY23E

Valuation Ratio (x)

P/E 12.8 9.8 10.6 9.8 8.8

P/CEPS 10.4 8.3 8.4 7.6 6.9

P/BV 1.77 1.62 1.44 1.28 1.14

Dividend yield (%) 1.0% 1.3% 1.2% 1.3% 1.4%

EV/Sales 6.01 4.91 4.60 4.15 3.37

EV/EBITDA 7.32 7.29 6.93 6.22 5.01

Per Share Data (Rs)

EPS 14.1 19.5 18.0 19.5 21.9

Cash EPS 17.3 23.0 22.9 25.2 27.9

DPS 1.76 2.43 2.25 2.43 2.73

Book Value 101.8 118.4 133.8 150.4 169.0

Returns (%)

RoCE 23.6% 23.4% 22.7% 22.3% 22.7%

RoE 13.8% 16.5% 13.5% 13.0% 13.0%

Turnover ratios (x)

Asset Turnover (Gross Block) 25.1 30.0 29.4 29.4 29.5

Receivables (days) 32 40 46 46 45

24

Gujarat State Petronet Limited (GUJS) is India’s second largest natural gas infrastructure and transmission company. It also generates electricity through windmills. It has set up a 52.5MW wind power project at Rajkot and Porbandar. Its subsidiaries are: GSPL India Gasnet (52% stake), which is engaged in development of Mehsana-Bhatinda and Bhatinda-Jammu-Srinagar pipeline projects GSPL India Transco (52% stake), which is engaged in the development of Mallavaram-hopal-Bhilwara-Vijaipur Pipeline Project) and Gujarat Gas (which 54.17% stake), is India’s largest CGD player with presence across 41 districts in 6 states and 1 UT. GUJS has an associate company), Sabarmati Gas (27.47% stake), which is engaged in the business of developing CGD networks in Gandhinagar, Sabarkantha and Mehsana districts of North Gujarat. GUJS transports >35mmscmd of natural gas to ~133 customers including refineries, textiles, chemicals, CGD segments as well as steel, fertiliser, petrochemical, power plants. Currently, it operates a medium-to-high pressure natural gas transmission grid comprising of ~2,692km of pipeline network.

Holding structure of company

Source : Company Annual Report, RSec Research

GUJS Gas Grid map of Gujarat base network-connected to all sources of gas and major consumers

GUJS pipeline connectivity to Ramgundam fertilizer, Barmer field & Punjab region

Source: RSec Research Source: Company, RSec Research

Company Overview

GSPC (Gujarat State Petroleum Corp.)

GSPL (GSPC hold 37.8%, Gujarat

Maritime hold 6.6%)

Gujarat Gas Limited (GGL), (GSPL hold

54.17% stake)

GSPL India Gas Limited (GIGL), (GSPL) hold 52%

Stake

GSPL India Transco Limited (GITL), (GSPL

hold 52%)

Sabarmati Gas Limited (SGL), (GSPL hold

27.47% stake)

25

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Change in Ratings

We have now only BUY and SELL Recommendation and have discontinued HOLD Recommendation.

We now have 2 Year Target Price and have discontinued with 1 year Target Price.

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