Recommendation From Oil Drilling Sector

Gujarat State Petronet (GSPL) is growing bigger by merging with Ahmedabad-based Sabarmati Gas (SGL) soon. GSPL’s bottom line growth in Q4FY16 remained impressive. Its low debt, distribution channel expansion plan and also venturing into new territory as it has been given green signal to run its activities in Bhatinda have been making things look better for the company, a Government of Gujarat enterprise.

Lower LNG, also lower domestic gas prices armed with policy triggers like distribution push, power sector revival have been aiding the volume. Power sector will be the biggest demand driver due to government’s stranded power plant revival policy. City Gas Distribution (CGD) projects have seen significant policy thrust with the government allocating first priority to domestic gas for CNG/DPNG. The government targets rapid expansion of gas distribution infrastructure with bidding for new areas, plans to double trunk pipeline network and freeing of CNG retailing.

GSPL has 25.8 per cent stake in Gujarat Gas’ merged entity, which is India’s largest CGD company. Gujarat State Petroleum Corporation (GSPC), with subsidiary Gujarat State Petronet (GSPL), holds 25 per cent equity interest in SGL. BPCL holds another 25 per cent and institutional investors collectively hold 49.8 per cent equity interest. SGL’s 62 per cent of business is generated through industrial and commercial segments, 32 per cent from CNG outlets that serve the automotive segment and around 6 per cent accrual through the piped natural gas network catering to homes in north Gujarat towns.

Merger between SGL and Gujarat Gas will help Gujarat Gas tap the north Gujarat and Mehsana regions, strong industrial belts with immense potential to grow natural gas business.

GSPL, in collaboration with IOCL/BPCL/HPCL, is developing three cross‐country pipelines — Mehsana‐Bhatinda, Bhatinda‐Jammu‐Srinagar and Mallavaram Bhilwara (Bhopal + Vijaipur). It has a 52 per cent stake in the special purpose vehicles laying these pipelines. However, these pipelines offer an eventual pan‐India presence to GSPL and can be a long‐term growth driver depending on gas availability.

Recently, GSPL got CGD (City Gas Distribution) network development grant from Petroleum and Natural Gas Development Board (PNGDB), in geographical area of Bhatinda in Punjab. It will cover an area of 3357 square kilometre. GSPL has also won Amritsar Geographical Area under PNGRB bidding.

On financial front, GSPL’s bottom line increased by 48 per cent to Rs 99.7 crore in Q4FY16 on yearly basis. Meanwhile, the company’s net profit decreased by 4.45 per cent to Rs 465 crore in FY16 as compared to previous financial year. We estimate GSPL’s volume growth at CAGR of 9 per cent in FY16-18.

On valuation front, GSPL is available at attractive PE multiple of 16.95x times as compare to its peers GAIL (23x), Indraprastha gas (19.17x), GSPL is at attractive PB multiple of 1.85x times as compare to Indraprastha Gas (3.17x). Hence, we recommend our readers to BUY this stock.