GSPL

The Gujarat State Petronet Ltd. (GSPL) stock has been very active in the last couple of weeks. It has gained about 20 per cent from the low of Rs 51 that it touched on March 19 even as other mid-cap stocks are languishing.

The stock had earlier undergone a drastic correction, halving in value from its high of Rs 109, registered in January, before the recovery over the last two weeks. At the current market price of Rs 63, the stock can be bought by investors willing to wait for returns over the medium term.

GSPL has a focussed business model as a transporter of natural gas in Gujarat without any exposure to commodity price risk. It is well-positioned in the Gujarat gas market with its pipelines connecting gas sources to existing and developing markets. GSPL is also venturing into city gas distribution through investment in group companies engaged in the lucrative and growing business.

However, the investment in rapid expansion of pipeline network is beginning to show up on the company’s financials.

Rising interest cost and depreciation charge are exerting pressure on profit growth. Besides, the regulatory policy on pipeline transportation and city gas distribution is evolving and is a risk to be taken note of.

Right place, right time


GSPL is fortunate to be in the right place at the right time. The mature gas market of Gujarat is set to witness all the action when Reliance Industries starts pumping out its KG Basin gas later this year. The company now transports about 18 million metric standard cubic metres of gas a day (MMSCMD) but this will double with volumes from just two contracts.

GSPL has signed a 15-year agreement with Reliance to transport 11 MMSCMD and another one with Torrent Power to transport 4.5 MMSCMD for 20 years. The long-term agreements lend visibility on usage of capacity and on revenues.

Supply of regasified LNG (liquefied natural gas) is also set to increase in a significant manner adding to transportation volumes for GSPL. Petronet LNG and Shell are expanding the capacity of their LNG regasification plants while BG India is planning to use Shell and Petronet’s terminals to bring in LNG on a spot basis.

GSPL’s existing pipeline network of 1,130 km will double in the next two years if the company’s expansion plans are implemented on time.

Importantly, they will connect high consumption, industrial areas of the State such as Morbi, Vapi, Pipavav and Mundra with gas sources or intermediate tap-off points of cross-country pipelines.

The company’s revenue model offers visibility over the long-term. GSPL’s transmission contracts are on a “take-or-pay” basis which means that the user has to pay a fixed charge if he fails to transport gas during the contract period.

Diversification


GSPL has picked up strategic stakes in group companies — GSPC Gas, Sabarmati Gas and Krishna Godavari Gas Network Ltd — that are setting up city gas businesses in Gujarat and Andhra Pradesh. City gas distribution, which includes supply of compressed natural gas for automobiles, will be a natural diversification for GSPL from its transportation business.

In the medium to long-term, the company also plans to venture beyond Gujarat into neighbouring States such as Rajasthan and Maharashtra to set up pipeline networks. Given the interests of its parent, GSPC, in the KG Basin where it has struck gas, a foray into Andhra Pradesh is also not ruled out.

Bottomline growth pangs


Though GSPL’s profit at the operating level is impressive, the company has posted a decline in net profits over the last few quarters. This is because of a rapid rise in interest cost and depreciation charge.

For instance, in the third quarter ended December 2007, interest cost doubled to Rs 20 crore following a similar trend in the previous quarter. Interest cost was higher by a third in the first nine months of 2007-08 compared to the whole of 2006-07.

Similarly, depreciation charges are also rising as the company capitalises its new pipelines. This trend is unlikely to reverse in the near term because GSPL is still in the investment phase. However, the higher charges should be absorbed comfortably as gas transportation volumes rise over the next few quarters.

Investors can buy the stock with a medium-term perspective