Equity Research report by Hedge Equities

1. 2010
COMPANY RESEARCH REPORT October 28, 2010
COMPANY RESEARCH REPORT
INITIATING COVERAGE
GUJARAT STATE PETRONET LIMITED
RECOMMENDATION: BUY
CMP: Rs. 116
1st TARGET: Rs. 128
2nd TARGET: Rs. 142
HOLDING PERIOD: 1-1.5 Years
RISK PROFILE: LOW

2. BUSINESS SUMMARY
Sector: Gas Transmission NSE Code: GSPL
Gujarat State Petronet Ltd (GSPL), a GSPC group EPS (TTM): Rs.7.46
company, is a pioneer in developing energy PE (TTM): 15.56 BSE Code: 532702
Industry PE: 18.88
transportation infrastructure and connecting Mkt. Cap: 6531.42 ISIN Code: INE7246F01010
natural gas supply basins and LNG terminals to 52 Wk high: Rs.128.25
52 Wk low: Rs.82 Reuters Code: GSPT.BO
growing markets. It is the only company in India to P/BV: 4.18
transmit natural gas for its clients without trading Beta: 0.90 Bloomberg Code: GUJS IN
Yield (%): 0.86
in it. Face Value: 10.00 Website:
Debt/Equity: 0.86
www.gujaratpetro.com
INVESTMENT RATIONALE / RISKS Institutional
Holding: 12.28%
As the world’s second largest growing economy in
the world, India’s need for energy is huge. Overall
macroeconomic conditions in the economy will set (In Crores) FY09 FY10 FY11E FY12E
the demand for energy and the growth of energy SALES 487.50 991.97 1030.09 1111.43
demand. India has been enjoying higher growth PAT 123.41 413.77 453.90 502.47
rates since the early 1990s because of economic EPS 2.19 7.36 8.07 8.93
reforms. This growth will contribute to greater PE 53.26 15.88 14.48 13.08
demand for energy. The robust growth outlook for
the Indian economy and the resultant increase in
the end - user consumption of the natural gas is
expected to drive the natural gas market in the
future. In this scenario, gas transmission business
plays a momentous role linking the supply sources
and the consumers both industrials and retail.
Talking about the GSPL, it is the second largest gas
transporter in the country, concentrating in
Gujarat: India’s most industrialized state. The
current grid operations of GSPL account for 1,666
km in the state and another 1100km pipeline is
underway. What makes GSPL a good bet is that it
had made a bid for four interstate projects (Total
length: 5724 Km) with which its network will get
quadrupled and the financial are expected to have
substantial growth.
Meanwhile, GSPL’s growth plans would be
impacted if the company faces regulatory delays in
authorization for installing new pipelines. Any
delay in execution and construction of new
pipelines would also impact the profitability of
GSPL. Source: Multiple Sources

3. December 29,
COMPANY RESEARCH REPORT
2010
Contents
BRIEF PROFILE .............................................................................................................................................................................. 1
COMPANY ADDRESS................................................................................................................................................................. 1
TOP MANAGEMENT ................................................................................................................................................................. 1
BUSINESS ...................................................................................................................................................................................... 2
PIPELINES ................................................................................................................................................................................. 2
SPUR LINES ............................................................................................................................................................................... 3
Gujarat Gas Grid....................................................................................................................................................................... 3
Expanding Outside Gujarat: National Grid............................................................................................................................... 4
Presence in City Gas Distribution through Associates ............................................................................................................. 5
GSPL GAS GRID MAP ................................................................................................................................................................ 5
Entering Wind Energy Business ............................................................................................................................................... 6
SECTOR ......................................................................................................................................................................................... 6
OUTLOOK AND SCOPE.................................................................................................................................................................. 8
FINANCIALS AND VALUATIONS .................................................................................................................................................... 9
HISTORICAL FINANCIALS .......................................................................................................................................................... 9
FINANCIAL OUTLOOK ............................................................................................................................................................. 10
RISKS........................................................................................................................................................................................... 11
INVESTMENT RATIONALE........................................................................................................................................................... 11
FINANCIAL HIGHLIGHTS ............................................................................................................................................................. 13
FINANCIAL RATIOS ..................................................................................................................................................................... 14
FINANCIALS GRAPH AND PEER GROUP COMPARISON .............................................................................................................. 15
ANALYST NOTES AND COMPANY NEWS .................................................................................................................................... 16

4. December 29,
COMPANY RESEARCH REPORT
2010
BRIEF PROFILE
Gujarat State Petronet Ltd (GSPL), a GSPC group COMPANY ADDRESS
company, is a pioneer in developing energy GSPL, GSPC Bhavan,
transportation infrastructure and connecting natural th
5 Floor, Behind Udyog Bhavan,
gas supply basins and LNG terminals to growing
markets. It is the only company in India to transmit Sector 11, Gandhi Nagar- 382011
natural gas for its clients without trading in it.
Gujarat State Petronet Limited was set up to
complement the efforts of GSPC . It has taken
initiative in developing energy transportation
infrastructure in Gujarat and connecting major
natural gas supply sources and demand markets.
GSPC recognized Gujarat’s concern for infrastructure
development in order to support the future TOP MANAGEMENT
hydrocarbon economy and industry. The company 1. Chairman – A K Joti
incorporated Gujarat State Petronet to develop a
2. Managing Director – Tapan Ray
high-pressure pipeline network for natural gas
transportation in Gujarat. The company has received 3. Non Executive Director - D J Pandian
ISO 9001: 2000 certification for operation and
4. Non Executive Director- Athanu
maintenance. GSPL is the only natural gas Chakrabarthy
transmission company in India that operates on
‘open access’ basis, i.e. it transports gas on behalf of 5. Independent Director – Suresh Mathur
third party shippers in return for a transport fee. 6. Independent Director –R. Vaidyanathan
GSPL’s existing gas transmission network comprises
7. Independent Director – J K Jain
1,666 km of medium to high pressure pipelines
connecting natural gas supply points at Hazira and 8. Company Secretary – Reena Desai
Dahej to consumption points covering the districts of
Ahmedabad, Anand, Baroda, Bharuch, Gandhinagar
and Surat. The majority of GSPL’s customers are
power, fertilizer, chemical and steel plants that
purchase natural gas directly from suppliers, as well
as several local city gas distribution companies who
supply natural gas to retail consumers.
1

5. December 29,
COMPANY RESEARCH REPORT
2010
BUSINESS remaining industrial clusters and medium size
customers along the pipeline network in Gujarat.
GSPL's primary operation is to connect various
GSPL sources its gas either from the gas fields of
supply sources and users of natural gas in Gujarat
GSPC and other companies, or from Liquefied
through gas pipeline network. It is the only pipeline
Natural Gas (LNG) terminals at Shell’s Hazira,
infrastructure company operating on an open access
Petronet’s Dahej, Reliance’s KG basin. GSPL has a
basis. Currently, GSPL operates a medium-to-high
mixture of long-
pressure gas transmission grid comprising It is the only pipeline
term as well as
approximately 1666 km of natural gas pipeline. infrastructure company
interruptible
While GSPC harnesses and procures natural gas, operating on an open access
gas
GSPL is building the infrastructure that transmits the basis. Currently, GSPL operates
transmission
gas across the state of Gujarat and ultimately allows a medium-to-high pressure gas
contracts with
last-mile linkage to the end-user. GSPL is transmission grid comprising
its customers.
continuously expanding its pipeline network in approximately 1666 km of
The Gas
Gujarat to reach the demand centers by laying gas natural gas pipeline.
Transmission
pipeline network. The company has signed gas
Agreements
transmission agreements (GTAs) with various
(GTAs) that GSPL enters into with its customers
industries for the supply of natural gas. The
designate the entry and exit points for the natural
company has developed requisite expertise and
gas as it travels through its gas transmission network
confidence with proven project management
and provide for terms such as tariff, tenure and
competencies. The gas grid is equipped with the
capacity reserved in its network. Tariff primarily
latest bi-directional gas transmission technology to
consists of capacity charges, which are fixed fees for
enable two-way gas flow. This introduces a lot of
the reservation of capacity and typically cover 90%
flexibility into transmission by allowing gas to be
of the customer’s tariff commitment and commodity
sourced or uploaded at either end of the pipeline
charges which are linked to the actual transportation
network. Another innovation is in the open access or
of natural gas through its gas transmission network.
contract carrier principle of transmission. This allows
GSPL’s GTAs include ‘ship or pay’ provisions which
any gas transmission company to approach GSPL for
require its customers to pay the capacity charge for
permission to use the network on payment of the
the capacity reserved by them regardless of the
required charges. Thus, private sector participation
actual volume of natural gas they transport. This
in gas transmission is encouraged, which makes
provides a strong visibility and sustainability to its
more volumes available for consumers. GSPL has
revenues.
already put in place a pipeline network of about
1666 km and has been expanding its network and PIPELINES
expects to complete the construction of approx.
GSPL’s is the second largest gas transmission
1100 kilometers of pipelines during the next 2 - 3
network in India. GSPL’s pipelines are connected to
years. Further, the Company also continues to
the major gas supply sources in Gujarat including
develop several other spur lines to connect
2

6. December 29,
COMPANY RESEARCH REPORT
2010
designated collection points near the natural gas SPUR LINES
fields of Cairn Energy, GSPC and GSPC Niko, all GSPL has special
located in Hazira, Shell’s Hazira, Petronet’s Dahej, pipelines meant The Company is currently
Reliance’s D6 field of KG basin. GSPL has a for industrial expanding its network and
transmission capacity of 50 mmscmd and transmits clusters and expects to complete the
36.7 mmscmd of gas of which over 64% is sourced medium and big construction of approximate
from RIL KG D 6, 25% from Petronet LNG and rest sized industrial 1100 kilometers of pipelines
from GSPC, Cairn India and PMT. The company has customers. These during the next 2 – 3 years.
1666 kms of gas pipeline in operation from Hazira – kinds of lines GSPL’s pipeline network,
Vadodra - Ahmedabad - Kalol – Himmatnagar- constitute a currently, lies in the Gujarat
Mehsana- Rajkot- Morbi- Anjar-Jamnagar. The gas notable part of state only.
grid of the Company has reached to 16 of 26 districts the total
in Gujarat. The Company is currently expanding its network. Since Gujarat is a huge gas supply sources,
network and expects to complete the construction of it has a good proximity to the industrial centers in
approximate 1100 kilometers of pipelines during the the state. Spur lines have been impressively grown
next 2 – 3 years. GSPL’s pipeline network, currently, on the back of high paced industrialization in the
lies in the Gujarat state only. state. The present spur lines have been connecting
the industrial houses like Essar Steel, Torrent Power,
Raymonds, Welspun and Alok Industries, GNFC,
Major Pipelines in Operation Videocon, Khribco, Utran, GACL, GFL, GSECL
Year Pipeline Length Dhuvaran, Sumangalam Glass, Ajanta
Commissioned (In Km) Manufacturing, Euro Ceramics, Metrade etc… The
2000-01 Hazira - Mora 14
Company also continues to develop several spur
2001-02 Amboli - Dahej 45
2002-03 Mora - Utran 25 lines to connect remaining industrial clusters and
Bhadhut - Paguthan 26 medium size customers along the pipeline network
2003-04 Paguthan - Baroda 64 in Gujarat like Hindustan Glass, Birla Copper, Tata
2004-05 Baroda - Ahmedabad -
143 Motors Nano plant etc…
Kalol
Mora - Sajod 58
Kalol - Santej 15
2006-07 Mora - Vapi 138 Gujarat Gas Grid
Anand - Rajkot 294
GSPL is now implementing a Gas Grid Project in the
Kalol - Mehsana 47
Kalol - Himmatnagar 63 state of Gujarat, which envisages transporting
2007-08 Padamla - Halol 37 indigenous natural gas from production centers and
2008-09 Rajkot - Jamnagar 110 LNG from terminals to demand centers all over
2009-10 Olpad- Utran 17
Gujarat through a high pressure trunk pipeline. It is a
2010-11 Gana-Hadala 85
Morbi- Mundra 130 pipeline transmission project to deliver gas to end
Source: Company
3

7. December 29,
COMPANY RESEARCH REPORT
2010
users and for local distribution. Under this, the (740 km).
GSPL led consortium has won
following pipelines have been proposed: With this, the
the bid for the two cross country
company is
pipelines namely Mallavaram-
 Bharuch‐Jamnagar (300Kms) extending its
Bhilwara (1,600 KM), Mehsana-
 Dahod‐Pipavav (250 Kms) reach outside
Bhatinda (1,670 km) and become
 Baroda‐Halol (60 Kms) Gujarat. The
the most competitive bidder for
 Morbi‐Mundra (250 Kms) total length of
the Bhatinda-Jammu-Srinagar
these
(740 km). With this, the
Under this, GSPL is setting up a 2,500km pipeline for pipelines
company is extending its reach
gas transportation. It already has a 1,666 km pipeline would be
outside Gujarat.
network in place. It is executing this pipeline 6,420km. This
network expansion project in two phases. Phase‐I is in a consortium with IOC, HPCL and BPCL. In the
involves investment of INR12bn and covers a consortium, the GSPL’s share is 52% while IOC has
distance of 525km from Vadnagar, in north Gujarat, 26% and HPCL and BPCL have 11% each. At present,
to Vapi, in the south of the state. Phase‐II involves GSPL has its gas grid network only within Gujarat
extending the network to Saurashtra, and for first time it is stepping outside state. PNGRB
Surendranagar, Rajkot and Jamnagar. The length of is expected to soon issue the Letter of Authorization
this segment is 600km and involves an investment of (LOA) to the GSPL-led consortium. The pipelines are
INR20bn. to be completed in 3 years from the date of issuance
of Letter of Authorization. Development of these
crucial pipeline networks will contribute significantly
towards the evolution of the much awaited National
Gas Grid. The three pipelines are estimated to be
built at a initial capital expenditure of Rs12,500 crore
having initial capacity to carry around 100 Million
Metric Standard Cubic Metres per Day of gas which
will traverse through states of Andhra Pradesh,
Maharashtra, Madhya Pradesh, Gujarat, Rajasthan,
Haryana, NCR, Punjab and Jammu & Kashmir. The
new pipelines will be connected to the existing
Gujarat grid thereby creating an integrated network
Expanding Outside Gujarat: National Grid covering approximately 1/3rd of the country's
It has been the biggest factor for the company that it geography enabling flow of gas from multiple gas
has won the bid for the two cross country pipelines sources to principal demand centres. These pipelines
namely Mallavaram-Bhilwara (1,600 KM), Mehsana- are expected to receive the gas from the sources like
Bhatinda (1,670 km) and become the most Petronet LNG’s Dahej, Shell’s Hazira, GSPC Mundra
competitive bidder for the Bhatinda-Jammu-Srinagar
4

8. December 29,
COMPANY RESEARCH REPORT
2010
terminal and GSPC’s and RIL’s discovery in the KG Presence in City Gas Distribution through
Gas basin. Associates
GSPL has also established a comprehensive
The company has a strong presence in City gas
operations and maintenance procedure to monitor
distribution services too. It has a stake in two city
and maintain the health of its gas grid. This gas distribution companies: GSPC Gas Co. Ltd. and
procedure includes 24 hour supervision of the entire
Sabarmati Gas Ltd. Sabarmati Gas, a JV between
pipeline through a SCADA system, monthly and
BPCL and GSPC, was incorporated in Jun 2006 to set
quarterly field inspections of the pipeline and yearly up the CGD project in Mehsana, Gandhinagar and
patrolling of the entire length of the pipeline to
Himmatnagar. Besides GSPL’s 36.51% stake in GSPC
monitor soil erosion, possible encroachments and Gas, GSPC holds 62% stake and GUJS’s seven largest
detection of pipeline leakage.
gas consumers hold the remaining stake. The stake
of GSPL in the Sabarmati gas has been 13.75%.
GSPL GAS GRID
MAP
Source: Company
5

9. December 29,
COMPANY RESEARCH REPORT
2010
Entering Wind Energy Business
GSPL has entered the energy sector too. From FY10, industrial sectors. Overall demand in India for gas is
It has begun to sell it out to third parties. A total of projected to increase from 209.6 mmscmd in the
52.5 MW wind power project in the areas of Maliya financial year 2010 to 343.5 mmscmd in the financial
Miyana, Rajkot and Gorsar, Porbandar is in progress year 2015 and 464.4 mmscmd in the financial year
out of which 6MW has already been completed in 2023 (Source: CRISIL Report). In fact many other
the FY10 itself. The project is expected to complete reports indicate such growth potential for India’s gas
the by FY12. market. Currently, Gujarat alone accounts for
approximately 40% of the gas demand in the
SECTOR Country. Demand for gas in Gujarat is projected to
In 2009, India was the world’s fourth largest grow from 85.4 mmscmd in the financial year 2010
consumer of energy, behind the United States, to 122.0 mmscmd in the financial year 2015 (Source:
China, and Russia. As per a Report by CRISIL Risk & CRISIL Report). In Gujarat, many industries are
Infrastructure Solutions Limited, named Indian Gas switching over to gas for their fuel and feedstock
Market Assessment, February 2010 (“CRISIL Report”) requirements. The expansion of the gas grid into
India‘s consumption of energy, on a per capita basis, new markets has resulted in substantial conversion
was one of the lowest in the world in 2009. Over the from alternate liquid fuels to gas as well as increase
past few years, demand for energy has risen in India in the demand for gas through expansion of
along with India‘s economic growth. Gas is currently capacities of existing projects, setting up of new
a minor fuel in the overall energy mix in India. industries and development of City Gas Distribution
However, gas consumption is expected to grow at networks in Gujarat. With the commencement of
4.2% per year on an average from 2006 to 2030. new discoveries in the eastern coast of India, the
(Source: Energy Information Administration, demand from new regions is expected to increase.
International Energy Outlook 2009). The main factors Domestic gas production is projected to increase
for increase in gas consumption are expected to be from 177 mmscmd in 2010 to 227 mmscmd in 2023
macroeconomic conditions and policies, the price (Source: CRISIL Report). This increase in production is
and availability of alternative fuels, the expansion of expected to arise from announced or new
gas related infrastructure, the development of discoveries of gas reserves, adding production to
policies in respect of carbon emissions, the existing fields. Domestic production may also be
identification of new uses of gas, programmes for supplemented in the future from LNG imports,
the implementation of city gas distribution networks production from coal bed methane fields, shale gas
and the fast evolving regulatory environment. It is etc. (Source: CRISIL, Report) In fact, even in 2009-10,
expected that natural gas will continue to play a the actual supply and consumption of gas could have
predominant role in sectors like power generation, been higher but for the capacity constraints in the
fertilizer, CNG & PNG distribution, refineries and existing trunk pipelines.
commercial segments and virtually in all the
6

10. December 29,
COMPANY RESEARCH REPORT
2010
Here, Transmission pipelines are the most vital regional pipelines, Assam Gas Company has a
segment, as they connect supply sources with prominent pipeline network in north‐east India. In
demand regions. Companies which own transmission addition to its 250km pipeline linking Sibsagar to
pipelines, sign Gas Transmission Agreement with Margherita, Assam; it has over 350km of branch
E&P companies, LNG Terminals, marketing pipelines in the region. But this network is
companies and other major end-users to provide insufficient to meet the increased supply and
access to their pipeline network. Transmission demand. To link the both, Gas transmission has to
companies are immune from the fluctuation in gas develop faster than earlier. It may be noted that the
prices as they do not purchase the gas but merely current capacity exceeds the gas supplies of 115.5
transport the gas. The gas supply is governed by Gas mmscmd, but does not indicate adequacy of current
Sales Agreements between sellers and buyers. infrastructure, as (a) the HVJ-Dahej- Vijaipur pipeline
Profitability of transmission companies is governed (DVPL) network, main supply trunk-line to northern
by transmission tariff and capacity utilization of its region, has already been operating at full capacity
network. Presently the total trunk pipeline network and cannot take any additional gas requirement (b)
is 11,070 km. The pipelines are owned and operated technically, capacities of gas transmission network
by central and state public sector undertaking, and along with its spur lines, when expressed in
also private companies. volumetric terms, are not
The increased clarity over Presently, the total trunk pipeline additive and would result in
future supply volumes, to network is 11,070 km double counting. A number of
certain extent, removed gas discoveries have been made
uncertainties lingering over in the Eastern region, while
sustainable and uninterrupted gas supply and historic industrial development has been in the
resulted in increased participation from private West. The distance between demand and supply
companies. Reliance Gas Transportation centers is bound to be a hindrance, if the gas
Infrastructure Limited (RGTIL) constructed a 1,385 network is not developed properly. With the existing
km long East-West pipeline (EWPL), country’s second LNG terminals at Dahej and Hazira, besides the
longest gas pipeline after GAIL’s Hazira-Vijaipur- upcoming ones at Kochi, Dabhol, Mangalore and
Jagdishpur (HVJ), to evacuate natural gas produced Ennore, there is an urgent need to develop the
from Reliance Industries Limited’s Krishna Godavari transmission lines connecting different states. While
(KG) basin. After commissioning of the EWPL, India’s the local distribution system may be developed over
current gas transmission network stands at 11,394 time, along with demand growth, the transmission
km (GAIL – 6,986 km, GSPL – 1,666 km, RGTIL – 1,385 system needs to be developed to enable various gas
km, others – 1,357 km) with capacity of 273.8 producers and LNG importers to reach the market.
mmscmd. . The gas pipeline network is spread across
Gujarat, Maharashtra, Rajasthan, Madhya Pradesh,
Uttar Pradesh, Delhi, Haryana, Andhra Pradesh,
Tamil Nadu, Tripura and Assam. Among other
7

11. December 29,
COMPANY RESEARCH REPORT
2010
OUTLOOK AND SCOPE feedstock. To take advantage of all these, GSPL is
expanding its network in Gujarat to 2,500 km as a
The outlook for gas is very promising with the
part of Gujarat grid and has won bid for setting up
demand from various industrial sectors looking
cross country pipelines of 6,420km, which is the
spectacular. Gas demand’s growth in the past was
company’s first stepping up outside the state.
mainly on the back of the demand from industries
like Power and fertilizers, which are likely to Gujarat State Petronet Ltd (GSPL) will be one of the
continue dominating natural gas demand in the major beneficiaries of increased gas availability in
coming years too. A number of power projects such India. GSPL’s extensive gas transmission network
as Torrent Power’s (TPW) plant at Sugen, National and additional expansion of its pipeline network in
Thermal Power Corporation’s (NATP) plants at the next two years will contribute significantly to the
Kawas and Gandhar in Gujarat and Reliance Power’s volume growth. Further, more than one-third of the
(RPWR) plant at Dadri, Uttar Pradesh, are likely to be production from D6 gas fields of RIL’s field in KG
commissioned in the next three to four years. Thus, Basin coming in to Gujarat is transported through
gas demand from the power sector is likely to GSPL’s pipeline
increase in a big way. Besides that, a large number of GSPL holds 13.75% in Sabarmati
network. The
Gas Ltd. and 36.51% in GSPC Gas
Interstate Pipelines for which Length company has
Co. Ltd. It is noteworthy to
signed long
GSPL led consortium has bid (In Km) mention that Sabarmati Gas Ltd.
term contracts
and become most competitive with various
(0.7 mmscmd) and GSPC Gas Co.
bidder Ltd. (3.0 mmscmd) together are
customers
among the largest CGDs in the
across several
Mallarvaram (Andhra Pradesh) – Country.
sectors, for
Bhilwara (Rajasthan) (formally won 1600
transmission of
the bid)
gas from RIL KG Basin fields. Further, the Company is
Mehsana(Gujrath)- Bhatinda (Punjab) 1670 developing several other spur lines to connect
remaining industrial clusters and medium size
Bhatinda - Jammu 740 customers along the pipeline network in Gujarat.
Besides, the emergence of new supply regions and
fertilizer plants still operate on fuel oil and naphtha. sources necessitates the development of a national
Fertilizer plants such as Gujarat Narmada Valley interconnected pipeline network. As a part of that,
Fertilizers (GNFC IN, NR) at Bharuch, Indian Farmers GSPL planned to set up pan–India pipelines, to take
Fertilizer Cooperative’s (IFFCO) plant at Kalol and advantage of the significant increase in supply
Gujarat State Fertilizers and Chemicals’ (GSFC) plant volumes.
at Baroda are still getting lower than requirements.
Thus, gas demand in the fertilizer sector is also likely With those, its total network will cross 5600km.
to be driven by higher demand from gas‐based Moreover, the Company holds significant equity
plants and plants that are looking to convert their interest in City gas distribution (CGD) companies,
8

12. December 29,
COMPANY RESEARCH REPORT
2010
which have natural synergy with gas transmission report robust RoEs and RoCEs for the next four to
business. GSPL holds 13.75% in Sabarmati Gas Ltd. five years.
and 36.51% in GSPC Gas Co. Ltd. It is noteworthy to
mention that Sabarmati Gas Ltd. (0.7 mmscmd) and FINANCIALS AND VALUATIONS
GSPC Gas Co. Ltd. (3.0 mmscmd) together are among
the largest CGDs in the Country. It is expected that HISTORICAL FINANCIALS
with the expansion of gas transmission pipelines and The historical financials gives a good picture of the
CGD infrastructure, these CGD companies would also company’s well paced journey. Both the top line and
continue to grow, going forward. The company also bottom line have grown in a greater momentum
has connectivity to all major natural gas sources in with the former grew at CAGR of 46.18% during FY07
Gujarat. and FY10 and the latter jumped at 66% during the
period. It was the FY10 during which the figures, be
GSPL’s ability to cater to demand centres and
it top line or
increase in domestic supplies of gas from Petronet GSPL’s Income from
bottom line,
LNG and Reliance KG D6 basin will drive gas Transportation of gas, which is
got doubled
transmission volumes at a faster space in the coming the primary operation of the
increasing at
years. GSPL’s gas transmission volume has jumped company, reached Rs. 991.95
three digit
from 14.9 mmscmd in FY09 to 36 mmscmd in FY10. crore, recording an increase of
rate. . It is
We believe GSPL will be one of the prime 103% over last year’s figure of
noteworthy
beneficiaries of increased gas availability in India. Rs. 487.50 crore. Meanwhile the
that the total
The commencement of gas production from the bottom line was Rs. 413.77 crore
operating
Reliance KG-D6 field will be the key growth driver for
expenditure to compared to Rs. 123.41 crores in
the company over the some years. The gas the previous year, recording an
sales ratio was
transmission volume from Reliance was 10.7 increase of 235.28%.
a mere 6%. As
mmscmd in FY10 and likely to be 14.8 mmscmd in
a Capex
FY11E. The additional gas supply from the new
oriented business, depreciation has been the big
Petronet LNG capacity of 5 MTPA and higher
daddy in the expenditure book. For the FY10,
capacity utilization of Shell’s LNG terminal will also
depreciation was 23% as percentage of sales. The
contribute to the volume growth for GSPL in the next
margins, too, are dazzling with the EBIDTA and PAT
two years. Over the past year, gas stocks have
reads at 96% and 41% respectively in the FY10. As
outperformed the Sensex by 25%; the
usual, what makes the difference in the EBTDA and
outperformance is likely to continue for the next
PAT are mainly Tax and depreciation followed by the
year. Transmission and distribution businesses have
interest expense. The company has been keeping the
network exclusivity for 25 years and marketing
tax rate at an average of 34%. GSPL also provides
exclusivity for 5 years as gas infrastructure is yet to
more than 23% of the sales for the depreciation,
be developed in India. We believe this exclusivity
which is by depreciating its pipeline assets at an
clause is likely to help pipeline and CGD companies
average of 8%. As the indicator of increase in the
9

13. December 29,
COMPANY RESEARCH REPORT
2010
operating efficiency, the operating expenditure grew perspective, GSPL is trading at 15.88 times of its FY10
at a CAGR of mere 7.7% only during the FY07-FY10. earnings, which doesn’t seem to be expensive while
To be worthwhile, the Gross Block of Assets has also that of the gas distribution industry stands at 18.8
increased from Rs. 2421.18 crores to Rs. 3325.49 times. Because of the jump in the overall financials
crores and consequently there has been an increase of the company in the FY10, the EPS had shot up and
in Depreciation from Rs. 170.49 crores to Rs. 236.49 the valuation has also become quite impressive.
crores. Talking about the profitability figures, as
already mentioned, its profitability ratios stood
outstanding with
FINANCIAL OUTLOOK
an EBITDA margin
FINANCIAL OUTLOOK Looking forward, the revenues are expected to step
of 96% and PAT
 The top line is expected to up 3.8% and 8% for the FY11 and FY12 respectively
was at 41%. The
grow at a CAGR of 6% from on a year on year basis i.e. at a CAGR of 5.8%.
performance
FY10 to FY12. Meanwhile beyond the FY12, the prospect looks to
ratios like ROE
 The bottom line is expected be spectacular when the cross country pipelines get
and ROCE have
to grow at a CAGR of 10.2% commissioned. The opportunities are eternal in the
also shot up in the
from FY10 to FY12. proposed pipelines but these will take at least 36
FY10 in tandem
 Depreciation as a proportion with the jump in months to commission. Since good figures have been
of sales which stood at 23% reported in the last fiscal, we cannot see the same
the company’s
For FY10 is expected to paced momentum in the next two years. There are
performance,
remain at that level the next with the same lies no such major pipelines, expected to be operational
2 years. within 2 years, under execution. The prospect the
at 30% and 28%
 Other manufacturing other operating income (Sale of electricity) for the
respectively. It is
expenses as a % of sales is next fiscal is expected at 11.73 crore and is likely to
also worth
likely to average around 3% register 358% for the FY12 as the current ongoing
mentioned that
for the next 2 years. energy projects are expected to be operational by
its wind energy
 The FY12 EPS is forecasted then.
division has also
to reach Rs. 8.93 started contribute The bottom line, too, are expected to grow at 9.7%
the top line in the and 10.7% respectively (YoY) for the period. For the
last fiscal. These next two years, it would be the employee cost and
are better among the peers. With the forte of the other manufacturing expenses to occupy major
kind of business, GSPL’s debt equity ratio was at 0.86 space in the expenditure book as the proposed
times. Meanwhile it has been maintaining dazzling bigger projects will get started. We don’t expect any
interest coverage ratio (7.68 times). As a sign of major changes in other operating expenditure
growing business, GSPL has been retaining 86% components like power and fuel cost, General and
(Payout ratio: 14%) of the earnings with it and had administration expenses, selling and distribution and
paid 10% dividend for FY10. From a valuation miscellaneous expenses, which likely to grow only as
10

14. December 29,
COMPANY RESEARCH REPORT
2010
in the past. With the growth in the bottom line, the of the company. Recently, there is a move from the
PAT margin is expected to reach 45% in the FY12. government side to make the tariff cheaper which is
Talking about depreciation, the company has been likely to push up the volumes with low margins. As
depreciating the pipelines in 12 years (around 8%) as of now, the tariff is under the full control of PNGRB
against the actual economic life period of 30 years. (Petroleum and Natural Gas Regulatory Board).
So for the initial years, the bottom line won’t reflect GSPL’s failure
the actual earnings. Meanwhile, the benefit of this to comply
RISKS
can be reaped after some years. with
prescribed
With the growth in the forecasted earnings (9.7%  Gas Supply Risk
technical
and 10.7% in the FY11 and FY12 respectively), the  Delay in authorization
parameters
forward PEs looked to be decreasing trend with the and construction of new
may also
same for the period works out to 14.48 and 12.92 pipelines
result in a
respectively. In the coming years, the increased  Regulatory risk
heavy fine and
availability of the gas and increasing pipeline  Proposed Social Tax
the company
infrastructure gives an assurance to the top line as (Gujarat government
coming under
well as bottom line. CSR at 30%)
the scanner of
the regulator.
RISKS
Proposed
Gas Supply Risk: GSPL’s profitability and valuations Social Tax (Gujarat government CSR at 30%): The
may be negatively impacted on lower than expected Gujarat government has proposed 30% CSR on pre-
gas supply volumes. Currently, natural gas has better tax profits on state-owned companies. GSPL’s
economics against alternative fuels like naphtha and contribution towards Gujarat Socio-Economic
fuel oil. However, any competitiveness of alternative Development Society will have an impact on the
fuels vis-à-vis natural gas would impact the volumes earnings and valuations of the company.
of GSPL. The sourcing of gas from the producers has
also a chance of being impacted. Delay in INVESTMENT RATIONALE
authorization and construction of new pipelines:
As the world’s second largest growing economy in
GSPL’s growth plans would be impacted if the
the world, India’s need for energy is huge. The role
company faces regulatory delays in authorization for
of industry in the growth of economy can never be
installing new pipelines. Any delay in execution and
ignored. The role of energy lies there to support the
construction of new pipelines would also impact the
industry whether it be manufacturing or else. In
profitability of GSPL. Regulatory risk: Petroleum and
2009, India was the world’s fourth largest consumer
Natural Gas Regulatory Board (PNGRB) has been set
of energy, behind the United States, China, and
up for the determination of transmission tariffs and
Russia. Overall macroeconomic conditions in the
authorization of gas transportation pipelines. If
economy will set the demand for energy and the
GSPL’s transmission tariffs are lower than expected,
growth of energy demand. India has been enjoying
this will have an impact on the financial performance
11

15. December 29,
COMPANY RESEARCH REPORT
2010
higher growth rates since the early 1990s because of (City Gas Distribution) and from refineries and
economic reforms. This growth will contribute to petrochemicals, which are trying to reduce their fuel
greater demand for energy. The robust growth costs and losses. The current grid operations of GSPL
outlook for the Indian economy and the resultant account for 1,666 km in the state. GSPL had made a
increase in the end–user consumption of the natural bid for four projects —Mallavaram-Bhilwara (1,600
gas is expected to drive the natural gas market in the KM), Mehsana- Bhatinda (1,670 km), Bhatinda-
future. The main factors for increase in gas Jammu-Srinagar (740 km) and Surat-Paradip (1,680
consumption are expected to be macroeconomic Km). Of these four pipeline projects, PNGRB had
conditions and policies, the price and availability of invited bids for the first three projects and GSPL has
alternative fuels, the expansion of gas related won the first two and has become the most
infrastructure, the development of policies in respect competitive bidder for the remaining. These projects
of carbon emissions, the identification of new uses stand as the most supporting pillars, calling for an
of gas, programmes for the implementation of city investment in the company. Besides, the company
gas distribution networks and the fast evolving has impressive profitability figures with the ROE
regulatory environment. Gujarat by far is the most stands at 29%, ROCE at 27% and ROA at 17%. These
developed gas market in the country. Currently, are better among the peers. As a sign of growing
Gujarat accounts for approximately 32% gas business, GSPL has been retaining 86% (Payout ratio:
consumption in the country. The per capita 14%) of the earnings with it and had paid 10%
consumption of natural gas in India is only around 29 dividend for FY10. In short, with good prospects of
SCM as compared to the world average of 363 SCM. growth, the stock is trading at levels where one can
There is clear room for growth even accounting for enter for a long term. In the coming years, the
the fact that gas may not be able to displace coal in increased availability of the gas and increasing
the power sector to the extent it may have in other pipeline infrastructure gives an assurance to the top
developed countries. In this scenario, gas line as well as bottom line. Another area to be
transmission business plays a momentous role looked at is that the company's transmission
linking the supply sources and the consumers both volumes will pick up in upcoming quarters as the
industrials and retail. Higher amount of availability supply sources would become very active when the
of the resources (Gas) and the impressive growth in KG Basin’s production picks up. Beyond two years
the pipeline infrastructure in the state also shore up (FY12), the scenario is quite promising with the
the rationale to invest in the sector. Presently, gas interstate pipelines. When the pipelines become
accounts for 10% of total energy consumption in operational; it would be a turning point in the
India, while the world average is 24%. Historically, company’s journey.
there has always been a huge gas deficit in the
In short, since the downside risk is, comparatively,
country. However, with the estimated increase in gas
low, even those who are risk averse in nature can
supply from new domestic discoveries and new LNG
enter the stock with a one year to one and half year
capacities, we estimate gas demand to increase
perspective.
substantially. Faster growth is estimated from CGD
12

16. December 29,
COMPANY RESEARCH REPORT
2010
FINANCIAL HIGHLIGHTS
Description FY10 FY09 FY08 FY07 FY06
Inc / Exp Performance
Gross Sales 991.97 487.50 417.90 317.56 263.47
Total Income 1019.52 511.81 447.30 335.36 267.99
Total Expenditure 62.31 62.85 53.42 49.84 69.31
PBIDT 957.21 448.95 393.88 285.52 198.68
PBIT 720.72 278.47 230.66 182.91 119.62
PBT 626.89 191.35 149.15 137.26 78.41
PAT 413.77 123.41 99.92 89.38 46.68
Cash Profit 650.26 293.90 263.14 191.99 125.74
Sources of Funds
Equity Paid Up 562.45 562.12 562.01 542.80 542.24
Reserves and Surplus 1001.38 653.08 578.95 423.11 365.26
Net Worth 1563.48 1211.86 1134.62 956.59 895.18
Total Debt 1259.55 1150.95 966.05 863.83 578.63
Capital Employed 2823.02 2362.81 2100.67 1820.43 1473.81
Application of Funds
Gross Block 3325.49 2421.18 2019.05 1888.92 980.51
Investments 66.58 35.58 35.58 0.00 0.00
Cash and Bank balance 174.17 97.47 256.93 181.12 237.20
Net Current Assets -78.50 28.40 39.08 209.25 159.59
Total Current Liabilities 833.42 533.14 510.60 184.46 177.08
Total Assets 2823.37 2366.15 2107.00 1829.75 1486.13
Cash Flow
Cash Flow from Operations 886.22 203.77 601.84 161.15 244.59
Cash Flow from Investing activities -761.73 -428.28 -621.85 -440.42 -604.93
Cash Flow from Finance activities -47.78 65.05 95.82 223.19 554.93
Free Cash flow -269.43 4.37 -569.13 -142.68 -526.25
Market Cues
Close Price (Unit Curr.) 87.50 38.30 56.15 46.75 36.65
High Price (Unit Curr.) 104.00 74.40 114.45 57.80 47.25
Low Price (Unit Curr.) 38.50 25.25 47.00 26.50 34.80
Market Capitalization 4921.43 2152.90 3155.67 2537.61 1987.32
EPS 7.36 2.20 1.78 1.65 0.86
Price / Book Value(x) 3.15 1.78 2.78 2.65 2.22
CEPS 11.56 5.23 4.68 3.54 2.32
Equity Dividend % 10.00 7.50 5.00 5.00 2.50
Enterprise Value 6006.80 3206.38 3864.78 3220.32 2328.74
Dividend Yield % 1.14 1.96 0.89 1.07 0.68
Source: Ace Equity
13

17. December 29,
COMPANY RESEARCH REPORT
2010
FINANCIAL RATIOS
Description FY10 FY09 FY08 FY07 FY06
Operational & Financial Ratios
Earnings Per Share (Rs) 7.36 2.2 1.78 1.65 0.86
Adjusted EPS (Rs.) 7.36 2.2 1.78 1.65 0.86
CEPS(Rs) 11.56 5.23 4.68 3.54 2.32
Adj DPS(Rs) 1 0.75 0.5 0.5 0.25
Book Value (Rs) 27.8 21.56 20.19 17.62 16.51
Adjusted Book Value (Rs) 27.8 21.56 20.19 17.62 16.51
Tax Rate(%) 34 35.51 33.01 34.88 40.47
Dividend Pay Out Ratio(%) 13.59 34.16 28.12 30.36 29.04
Margin Ratios
PBIDTM (%) 96.5 92.09 94.25 89.91 75.41
EBITM (%) 72.66 57.12 55.2 57.6 45.4
Pre Tax Margin(%) 63.2 39.25 35.69 43.22 29.76
PATM (%) 41.71 25.32 23.91 28.15 17.72
CPM(%) 65.55 60.29 62.97 60.46 47.72
Performance Ratios
ROA (%) 15.95 5.52 5.08 5.39 4
ROE (%) 29.82 10.52 9.56 9.65 7.22
ROCE (%) 27.8 12.48 11.77 11.1 10.31
Asset Turnover(x) 0.38 0.22 0.21 0.19 0.23
Inventory Turnover(x) 8.81 7.37 9.96 7.91 11.03
Debtors Turnover(x) 15.3 10.16 10.92 13.06 21.6
Sales/Fixed Asset(x) 0.35 0.22 0.21 0.22 0.28
Efficiency Ratios
Fixed Capital/Sales(x) 2.9 4.55 4.68 4.52 3.52
Receivable days 23.85 35.93 33.42 27.94 16.9
Inventory Days 41.44 49.52 36.64 46.17 33.08
Payable days 554.98 676.03 511.17 361.8 235.93
Growth Ratios
Net Sales Growth(%) 103.48 16.66 31.6 20.53 29.48
Core EBITDA Growth(%) 113.21 13.98 37.95 43.71 51.24
EBIT Growth(%) 158.82 20.73 26.11 52.91 82.01
PAT Growth(%) 235.27 23.51 11.79 91.49 190.91
EPS Growth(%) 235.08 23.49 7.97 91.29 87.75
Financial Stability Ratios
Total Debt/Equity(x) 0.87 0.9 0.88 0.78 0.79
Current Ratio(x) 1.56 1.5 1.31 2.91 2.17
Quick Ratio(x) 1.28 1.25 1.21 2.58 1.93
Interest Cover(x) 7.68 3.2 2.83 4.01 2.9
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18. December 29,
COMPANY RESEARCH REPORT
2010
Source: Ace Equity
FINANCIALS GRAPH AND PEER GROUP COMPARISON
Source: Multiple Sources
Year EPS(Unit
Company Name Net Sales PBIDT PAT PBIDTM% PATM% ROCE% ROE%
End Curr)
Eastern Gases FY10 38.4 1.84 0.47 0.67 4.79 1.23 15.44 6.71
GAIL India FY10 24996.4 5210.29 3139.8 24.75 20.53 12.37 27.15 19.89
Mahanagar Gas
FY10 639.4 262.92 147.01 16.45 37.37 20.89 34.32 23.41
Ltd.
Rel. NatRes FY10 270.02 167.08 69.87 0.43 61.88 25.88 5.34 3.96
Guj. Petronet FY10 991.9 957.21 413.7 7.36 96.5 41.71 27.8 29.82
Source: Ace Equity
15

19. December 29,
COMPANY RESEARCH REPORT
2010
ANALYST NOTES AND COMPANY NEWS
December 29, 2010
Pipeline companies may be able to
charge a lower tariff rate than
determined by the board. The Board
has proposed amending the PNGRB
(Determination of Natural Gas Pipeline
Tariff) Regulations, 2008, and has
invited comments from stakeholders
and experts. The issue came up in a
pre-bid conference for pipelines and
some bidders had wanted to know if
they could offer a rate lower than what
was determined by the Board.
16

20. December 29,
COMPANY RESEARCH REPORT
2010
Researched and prepared by:
Muhammed Aslam E
Fundamental Analyst
Email: muhammedaslam.e@hedgeequities.com
Ph: (0484) 3040400, 3040419
In co-operation with:
Amar Chandramohan
Sr. Fundamental Analyst
Email: amar.c@hedgeequities.com
Krishnan Thampi K
Head of Research and Strategies
Email: krishnanthampi.k@hedgeequities.com
HEDGE RESEARCH & STRATEGIES GROUP DIRECT ALL RESEARCH QUERIES TO:
Head of Research: Krishnan Thampi K
Sr. Fundamental Analyst: Amar Chandramohan Research & Strategies Group
Jr. Fundamental Analyst: Muhammed Aslam E Hedge Equities Ltd
Sr. Equity Technical Analyst: Anish Chandran C V 12 Floor, -Mini Muthoot Tech Towers
Sr. Commodity & Equity Technical Analyst: Kesavamoorthy B Kaloor, Kochi– 682017, Kerala, India
Jr. Technical Analyst: James George Phone: (0484) 3040400
Futures & Options Analyst: Yunus Ismail Email: research@HedgeEquities.com
Access all our research reports online at www.HedgeEquities.com
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17