Upgrading to BUY on value post correction
Key Points
We are raising GSPL from HOLD to BUY due to improved risk reward based on 27% correction in the stock in the last 3m, and our unchanged estimates and SOTP-based TP at Rs364 (Exhibit – 1). This is derived with 10% discount for policy risk in GSPL standalone transportation valuation using DCF (risk factor added due to policy uncertainty/risk to volume due to volatile gas prices). This also includes the unchanged value of its 54.17% stake in GGL at Rs371/share based on NBIE’s TP for GGL (~nil Hold-Co. Discount). The stock trades at 1.28x FY27E P/B).
GSPL is a BUY also based on GSPC group merger scheme. This is based on the value implied for GSPL post the merger and demerger (next year) transaction (GSPLpt). The value of GSPLpt is derived by adding up (i) the value of 100 GGL shares (at CMP), and (ii) 33 GSPL transmission Ltd shares (GTL), to be allotted to a GSPL shareholder, and reducing the cost of acquiring 130 GSPL shares at the CMP. GSPL is worth Rs344/sh based on the above method (Exh 2). The stress valuation of GSPL of Rs287 under this method assuming a 20% downside in GGL CMP also implies upside of 6% from GSPL’s CMP.
We understand that 4QFY25 Gas volume is likely to sustain at 3QFY25 level~implies 10% decline YoY. Capex is likely to be Rs2.5-2.75 bn/Rs10bn in FY25/FY26E to add connectivity. Channel checks suggest that the proposed Anjar-Palanpur pipeline pending PNGRB approval (Project cost – cRs30bn) could improve connectivity to JV GIGL operated Mehsana Bhatinda pipeline. This could enhance the gas offtake (RLNG) from group company GSPC LNG from its current volume of around 5- 6mmscmd (1.4-1.7mn tpa of LNG). This upside is subject to the cap on offtake of RLNG from GSPC LNG, due to take or pay contract that GSPC has with PLNG for taking gas from Dahej LNG terminal.
GGLGSPC GSPL group mergers scheme to see GSPL carve out a pure gas transmission entity GSPL Transmission Limited (GTL). This process is delayed by a month due to the delay in SEBI/stock exchange approvals. The next step of shareholder approval is to begin by end Mar’25. The papers are now with the Government (MCA), which will send it to ROC. Once ROC clears it, the papers will be forwarded back to MCA for final approval – now likely by Sep’25 vs Jul-Aug’25 as per GGL 3QFY25 PPT. Issue of shares as per scheme, Final listing of additional GGL shares and new GTL shares likely by Sep’25/Oct’25. Notwithstanding the slight delay, the value proposition for GSPL shareholders as per above analysis remains intact. (See Annexure-1 for Scheme timeline).
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