Call by Citigroup
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Gujarat State Petronet- Correction Overdone. Revising price target to Rs 84Strong, visible volume growth ¡X We estimate total volumes will increase to 51 mmscmd by FY12E (c18-19 now), an achievable number in our view, driven by the RIL contract (20), Torrent Power volumes (4.5), and further contributions from RIL, GSPC, R-LNG, etc. (
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Based on our discussions with management, we have toned down our volume assumptions in the interim period primarily factoring:
1) conservative timeline for KG gas i.e. Dec-08 vs. Jun-08 earlier;
and 2) slower ramp up of KG gas (peak 20 mmscmd from FY11E).
Regulatory risk: low and manageable ¡X The draft regulations circulated a while back suggest a fixed allowable rate of return, which is yet to be disclosed. This appears neutral for GSPL¡¦s tariffs, which are quite reasonable ¡V FY08E adj. ROE of ~14% ¡V and hence unlikely to be adversely impacted.
Also, grossing up for income tax payable (relevant for new pipelines) and flexibility in capital structuring could help support higher ROEs. Opening of new areas for laying pipelines bodes well for GSPL¡¦s future growth, beyond Gujarat.
Revising target price ¡X We cut our target price to Rs84 (Rs104 earlier) to factor in changes in our volume assumptions and a higher cost of capital (14.9% cost of equity) to factor in higher stock volatility
