Analyst Corner| Reiterate ‘buy’ on GUJS with target price of Rs 400

Gujarat State Petroleum (GUJS) has a 54% stake in Gujarat Gas (GUJGA), which amounts to a market capitalization of Rs 197b, much higher than GUJS’ m-cap at Rs 156b.

Major concerns for the above anomaly have been expected decline in tariffs of GUJS due to over-utilization of the High Pressure grid, and concerns over the usage of cash. Gujarat State Petroleum Corporation (GSPC), the parent company of GUJS with a 37.6% stake, has traditionally been a debt-ridden company, raising concerns whether the cash generated by GUJS may be used to reward minority shareholders.

In our earlier report (Large appetite for growth), we have addressed the first concern on tariff. This note busts the second myth. At a 25% holding firm discount, the 54% stake in GUJGA provides a valuation of INR275/share to GUJS. We value GUJS’ standalone operations at 7x to arrive at our TP of Rs 400/share (core business continues to trade for free) and reiterate Buy.

GSPC’s tryst with upstream investments has not been successful, resulting in its standalone/consolidated net debt rising to a peak of rs 234b/ rs277b in FY17. It sold off its stake in the KG basin in FY17 to ONGC and wrote off `149b. It also consolidated its stake in GUJGA with GUJS in FY18. As a result of better profitability from subsidiaries/JVs and lack of continued capex in upstream, consolidated net debt has reduced from a peak of Rs 262b in FY17 to Rs 76b in FY20.

The company recorded cumulative impairment losses of ~Rs 162b over the past five years, with the biggest loss coming in from the KG basin in FY17. GSPC has also written-off exploration costs of ~Rs 36bn over the past decade. The management classified 12 E&P fields as assets held for sale in FY19 and had provided for an impairment loss of ~Rs 1.5b.