Gujarat State Petronet's Q3FY19 results (Outperformer) - Higher opex drag earnings

Q3FY19 highlights 

• Gujarat State Petronet’s (GSPL) reported earnings were impacted by higher costs and lower than estimated volumes, despite an upward revision in tariffs in Q2.
• Adj EBITDA/PAT of Rs3.5bn/Rs1.7bn were well below IDFCe of Rs4.1bn/ Rs2.3bn. This impact was on account of higher other expenses which grew 2x yoy, +35% qoq, includes higher SUG charges of Rs0.3bn for Q3. 9MFY19 EBITDA of Rs10.9bn vs 9MFY18 EBITDA of Rs8.8bn. 9MFY19 other expenses grew 2x yoy again driven by higher SUG charges.
• GSPL reported volumes of 34.5 mmscmd were below est (+3% yoy, -1% qoq, IDFCe 36 mmscmd). 9MFY19 volumes were at 35.3 mmscmd (+15.3% yoy)
• Blended tariffs of Rs1.42/scm (+26% yoy, -2% qoq) were bleow IDFCe of Rs1.45/scm. 9MFY19 tariffs were at Rs1.3/scm (+18.3% yoy)

Key positives: Higher tariffs

Key negatives: Higher opex/interest costs and weak volumes

Impact on financials: FY19/20E EPS revised downwards -14%/-7% to factor lower volumes and higher costs. TP cut to Rs218/sh

Valuations & View

The 15% underperformance to the Sensex of GSPL Stock (last 6M) provides a good opportunity to enter the stock, despite the miss this quarter. We see FY19-20E transmission volumes being boosted by the push back of RIL’s Petcoke gasification project to end of Q4FY19E/Q1FY20E, torrent power’s offtake of 1.5mmscmd and ramp up of Essar Steel’s offtake to 1.5-2mmscmd. Despite the estimated 5-6 mmscmd reduction from RIL in FY20E therefore, we still see average volumes at ~35/37/39 mmscmd for FY19E/FY20E/FY21E, with upside risk from revival of power demand, higher demand via GSPC Mundra terminal and commissioning of specific sections of the cross country pipelines over FY20E. With the long pending tariff order now coming through and visibility on volume growth, EPS CAGR for FY19-21E stands at 9%. Valuations of 6.4x FY21E EPS are attractive. Reiterate Outperformer.