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Gujarat State Petronet (GSPL), promoted by Gujarat State Petroleum Corporation (GSPC), transmits natural gas. The company currently owns and operates 433 km of natural gas pipeline, from Hazira to Kalol, catering seven of the 25 districts in Gujarat, This is the second largest natural gas transmission network in India. GSPL is the first company in India to transport natural gas on an ‘open access’ basis: the company makes its gas transmission capacity available to any shipper on a non-discriminatory basis. It does not trade in natural gas and is not directly affected due to its fluctuating prices.
GSPL will establish another 742 km of natural gas pipeline, covering seven more districts of Gujarat, with an estimated capital expenditure of Rs. 1400 crore. The company hopes to mobilise around Rs. 370 crore from the present IPO. It has tied up with a consortium of banks/FIs for loans of Rs. 758 crore. The balance is to be financed by internal accruals. This expansion, which is expected to complete by July 2007, will enable GSPL to reach new customers in Vapi, Saurashtra, Mehsana and Himmatnagar among other markets.
The 18 customers of GSPL are mainly from the fertilizer and power sectors, including GPEC, Essar Steel, Essar Power, Iffco, AEC, GNFC, GSFC, and Arvind Mills. The expansion will allow the company to service even medium-sized companies and varied industries such as ceramics and chemicals. Currently, its pipeline transport 13 million metric standard cubic meters per day (mmscmd)) of natural gas of various suppliers, including Cairn Energy, GSPC – Niko, Hazira LNG, Petronet LNG, and PMT Gas. The existing pipeline is capable of transporting around 40 mmscmd of natural gas. The utilisation is expected to double to 26 mmscmd in three years.
The tariff structure is based on the distance as against fixed tariff of Gail (India). Nearly 90% of these charges are based on capacity booked. GSPL operates on a 15-day billing cycle. The next two billing cycles are insured.
Strengths
- GSPL enjoys the first-mover advantage in the new pipeline that it is establishing and is expected to enjoy near-monopoly for an extended period of time in future.
- Global demand for natural gas is expected to grow at an average rate of 2.3% in the next 20 years, while the Indian demand for natural gas is expected to go up at around 5.4% per annum to 400 mmscmd, from the present 150 mmscmd in the same period. The weightage of natural gas in the energy basket of India is expected to increase from the present 8% to 20% by 2025. In fact, supply, and not demand, is a constraint.
- Gujarat, where GSPL is located, produces nearly 65% of the total natural gas production of India. The state hosts the only two LNG terminals in India. Also, of the 55 oil and gas exploration blocks offered under the upcoming sixth round of New Exploration Policy. majority are expected to be in the Krishna Godavari (KG) basin. So supply of gas will increase significantly, though timing and quantity is not ascertainable.
- Bulk buyers favour the "open access" system adopted by GSPL as it allows them the flexibility to choose the supplier for natural gas.
Weaknesses
- Impending government policies on regulating natural gas production and transmission may affect prospects. However, since GSPL is already operating on "open access" basis, which is one of the major motives behind the policy regulations, it is not expected to suffer heavily. These policies may put a cap on the maximum tariff chargeable.
- GSPL is establishing a pipeline infrastructure in anticipation of increasing availability of natural gas at reasonable prices in the future. Major contracts for import of LNG in India are expected to be functional from 2008/09 onwards, until then the natural gas supplies will depend mainly on existing contracts and domestic production. Thus, a shortage of natural gas may hamper the company’s growth targets in the short term.
- The process of acquiring land, rights of use (RoU) and rights of ways (RoW) for laying pipeline is prone to litigation and, therefore, highly time consuming.
Valuation:
*GSPL has set a price band of Rs. 23 to Rs. 27, which translates into a PE of 24 x to 28.2x annualised EPS in the half-year ended September 2005 on post-issue equity
*Gail (India) and Gujarat Gas (GGCL) are the only two companies operating in a business similar to that of GSPL. These companies are presently trading at PE multiples of 9.1 and 16.7, respectively, on their half-year annualised EPS. However, growth rates for GSPL are likely to be higher.
*GSPL is considering reducing the depreciation rate on pipelines from 8.33% to 3.17% in line with the new depreciation policy recognised by the Ministry of Company Affairs. Gail has adopted the new rate from the current year. The new rate will significantly boost net profit.