Accumulate GSPL; 25% upside expected: Kotak Sec

MUMBAI: Kotak Securities has upgraded its call to ‘ACCUMULATE’ on Gujarat State Petroleum and expect it to appreciate 25 per cent for a target price of Rs 40. The brokerage had earlier recommended a ‘REDUCE’ call in January.

The brokerage is positive on the medium to long term growth prospect of GSPL due to rising gas demand, expansion of pipelines and strategic stakes in city gas distribution projects.

“Looking at good business prospects, post Reliance gas and rising naphtha prices, we feel that GSPL is attractively valued at 5.2x FY10E CEPS of Rs.6.2. Thus we upgrade GSPL to ACCUMULATE with unchanged price target of Rs.40 (~25% upside potential),”

“At Rs 32, the stock trades at 1.4x book value, 14.7x earnings and 5.2x cash earnings based on FY10E. We feel that GSPL should be looked on P/CEPS basis rather then P/E basis as GSPL depreciates its pipeline in 12 years as against its economic life of 30 years. Thus we feel that CEPS is more representative of its true earnings per share. We have also done a one-year forward rolling band analysis for GSPL, which revealed that currently the stock is trading at the lower end of the band of 5x-20x one year forward cash earning estimates,” the report added.

The company is likely to benefit with the recovery in naptha prices which will in return help to transport increased volume of gas, say the report. It also adds that flow of gas from Reliance Industries and increased flow from Petronet LNG is positive for GSPL.

“For FY10E, we expect GSPL to report EPS of Rs.2.2 and CEPS of Rs.6.2. We have accounted for payment of 30% of PBT to the Gujarat Socio-Economic Development Society to be used for the socio economic development of the state. We have valued GSPL on DCF method of valuation with 13.1% WACC (12.5 earlier) and 3% terminal growth rate. Thus the price target is Rs 40 per share for GSPL (no change). Over FY08 to FY10E the revenues of GSPL are expected to grow at CAGR of 24.7%. However PAT is expected to record lower growth rate of 10.6%. This is primarily on account of payment of 30% of PBT to GSEDS to be used for the socio economic development of the state,” the report says.

RISK FACTORS:

Reduction in naphtha prices would decrease the demand for gas thereby impact volumes of gas transported through GSPL pipelines.

Further delay in K G basin of Reliance Industries would lead to downward revision in our earning estimates.

source: Economictimes

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