Lower earnings estimates for FY2021-22 versus FY2020 reflect our expectation of 11% cut in pipeline tariffs due to alignment of lower tax rate by PNGRB

GSPL’S STANDALONE earnings peaked out in FY2020 boosted by lower tax, while EBITDA increased modestly by
2% despite a healthy 9% growth in volumes. We expect earnings to decline meaningfully hereon led by tax-related 11% cut in tariffs in FY2021, lower volumes due to Covid- 19 impact in near term and reduction in LNG off-take by RIL in medium term and sharp 20%+ cut in tariffs in FY2023 in lieu of volume-led-profit surplus for FY2019-22.

‘Sell’ stays with a revised FV of Rs 210. The company may face headwinds to industrial volumes, particularly in
Morbi region, from imminent slowdown in domestic demand as well as exports for ceramic products. We cut GSPL’s standalone EPS estimates by ~10% to 12.8 in FY2021 and Rs 11.8 in FY 2022 factoring in modestly lower volumes and tariffs versus our earlier assumptions. Lower earnings estimates for FY2021-22 versus FY2020 reflect our expectation of 11% cut in pipeline tariffs due to alignment of lower tax rate by PNGRB in its calculation to ensure post-tax IRR remains unchanged at 12%, lower volumes in FY2021 impacted by lockdown and slowdown due to
Covid-19 outbreak and gradual reduction in volume off-take by RIL during FY2021-22 as it substitutes LNG with ramp-up of petcoke gasification.

We expect tariffs to fall further by over 20% in FY2023, as PNGRB will prospectively adjust the surplus profits
being realized by GSPL during FY2019- 22E period, due to volumes being substantially higher than PNGRB’s
assumption of 29 mcm/d in FY2019 and 26 mcm/d during the remaining life of pipeline; regulatory review is
due in September 2021. Our SoTP based fair value reduces to Rs 210 from Rs 225 earlier due to a reduction in value
of Gujarat pipeline network as we build in lower tariffs in the long run.