Gujarat State Petronet's Q2FY18 results (Neutral) - A good quarter but valuations fairly balanced

Q2FY18 highlights 

• Net earnings at Rs1.8bn (IDFCe Rs1.7bn), while EBITDA of Rs3bn improved 33% yoy (IDFCe Rs2.8bn), driven by a 27/17% yoy/qoq increase in transmission volumes. The delay in RIL’s petcoke gasification project and some increase in power demand has driven the increase.
• Reported tariff of ~Rs1.1/scm, up 3% yoy, marginally below Rs1.15/scm.. Transmission volumes of 31.6 mmscmd for the quarter, ahead of estimates of 29 mmscmd
• Operating costs of Rs493mn +55% yoy) negatively impacted PAT for the quarter, with EBITDA margins at 86% vs 93% in Q1FY18/ 88% in Q2FY17.

Key positives: Sharply higher volumes.

Key negatives: Higher opex and delay in revised tariff orders.

Impact on financials: FY18/19E EPS revised up 9% for FY18/19E to factor higher volumes. FY20E EPS estimates of Rs15.2/sh introduced. TP revised to Rs215/sh. 

Valuations & View:

Gujarat State Petronet’s (GSPL) stock price has outperformed the broader index by ~13% (last 3 mths), with the pushback of RIL’s petcoke gasifier to FY18E end, commissioning of OpAL’s Dahej plant (1.2-1.5 mmscmd gas demand), torrent power starting offtake of ~1.5 mmscmd gas from PLNG’s Dahej terminal and Essar steel’s offtake of 1.5 mmscmd serving to boost medium term prospects for the company. We estimate transmission volumes of ~29.5 mmscmd in FY18E vs ~25 mmscmd in FY17E). Having said that, we believe given the progress on RIL’s offgas cracker (ROGC) and therefore the imminent reduction of its gas offtake via GSPL (~5 mmscmd) volume growth will be muted in FY19E (we estimate 32 mmscmd in FY19E), even though higher LNG  availability and benign prices imply this impact will be mitigated over FY19-21E. At CMP, the stock trades at 14.2x FY20E EPS/ 8.1x EV/EBITDA and 1.9x book value, which we believe fairly captures the upsides from 18% CAGR in EPS over FY17-20E.Reiterate Neutral.