Widening Reach

GSPL is likely to capture growing volumes once its supply-side concerns subside. Long-term investors can add the scrip to their portfolio at attractive valuations

Flat volumes and stagnating profits over the past four to five quarters and bleak outlook on the domestic gas production are key concerns for Gujarat State Petronet (GSPL) now. However, the potent domestic demand for gas is a reality, which will need GSPL''s pipeline network to fulfil. The company''s growing reach implies that it will be able to capture growing volumes once supply-side constraints are relieved. Long-term investors should add this scrip to their portfolio.

GSPL owns and operates India''s second-largest natural gas pipeline network of nearly 1,900 km connecting 19 out of 26 districts of Gujarat. Unlike its peers, the company does not trade in natural gas and operates its pipeline grid on ''open access'' basis. As a result, its entire income comes from pipeline tariffs. The company is also in the process of setting up a 52.5-MW wind power capacity.

Growth Drivers
GSPL operates in Gujarat, which represents nearly 35% of India''s total natural gas consumption. The company continues to expand its network proactively with a capex of Rs 600 crore annually, which it can finance comfortably through its internal accruals. With this capex plan, the company aims to reach all 25 districts of Gujarat by FY14.

The company currently transports close to 35.5 million standard cubic metres per day (mmscmd) of gas and retains substantial extra capacity for additional volumes. The company is expected to commission at least 1,500 MW gas-based power capacity this fiscal year, which means higher volumes for GSPL.

The GSPL-led consortium has emerged as the lowest bidder for three long-distance gas pipelines totalling nearly 4,500 km entailing a capex of nearly Rs 21,500 crore.

At the end of September 2010, GSPL had a capital of nearly Rs 3,440 crore invested in the business funded by debt and equity in 0.85:1 proportion. During 2010, the average tariff it earned was around Rs 800 per thousand cubic metres, which was down from Rs 950 in 2009.

The company''s quarterly net profits have stagnated at close to Rs 110 crore since the quarter ended September 2009. In the December 2010 quarter, the company reduced the rate of depreciation from 8.33% to 4.75%, which boosted profit to Rs 159 crore. This is still higher compared to Gail, which charges depreciation at 3.17% on its pipelines.

The company''s return on capital employed rose 27.8% in FY10 after hovering at around 11-12% in earlier years. The company''s ROCE is expected to remain high at around 24-25% for FY11 as well, thanks to the reduction in the depreciation rate.

The valuations of the scrip have fallen to its lowest levels in the past five years due to the stagnation in profits and the lack of visibility over incremental gas supplies. Considering its profit for the trailing 12 months, the scrip is trading at a price-to-earnings ratio (P/E) of 12.2. This is the lowest among its peers such as Gail, Gujarat Gas and Indraprastha Gas which command a P/E between 16.5 and 18.5.

Ramkrishna Kashelkar