Stock Of The Day: Gujarat State Petronet — Analyst Views, Key Levels

Gujarat State Petronet Ltd.'s key high pressure pipeline network in the state received a 47% tariff cut to Rs 18.1 per million British thermal unit, compared to the previous rate of Rs 34 per million British thermal unit by the Petroleum and Natural Gas Board of India. This tariff stood much lower than the Rs 54 per million British thermal unit rate sought by the company.

Shares of Gujarat State Petronet hit the lower circuit at 19.99% in early trade on Monday at Rs 302.15 per share. The stock has risen 14.32% in the last 12 months.

Key Levels To Watch

• Resistance level: Rs 340 per share.

• Support level: Rs 280 apiece (five-month low).

Tariff Cut

The new tariff stands 64% below what the company was seeking. Lower capex, higher volumes and lower opex are the key reasons for the cut. The authorised levels by the gas regulatory stood drastically different than the company's.

Gujarat State Petronet claimed total future capex outgo of Rs 3,400 crore in its tariff filing, while the PNGRB considered Rs 1,800 crore. With respect to the operating expenditure, the PNGRB approved a future opex of Rs 2,600 crore, compared to the Rs 5,000 crore claimed by the company. In terms of volumes, the company assumed 26 million of standard cubic metres of gas per day while the regulator took a value of 31.7 mscmd.

Some of the assumptions by the company in the tariff filing were escalated, according to AK Tiwari, a member of the board.

Impact Of Tariff Cut

The tariff order issued by the PNGRB specifies the prices that Gujarat State Petronet can charge for transporting natural gas through its pipeline network.

While the tariff cut could translate into lower prices for end-user consumers as well as industrial customers, it applies pressure on Gujarat State Petronet's revenue and profits.

The cut could also create a key overhang for Gujarat Gas, where Gujarat State Petronet has 54% ownership, according to Citi. Gujarat Gas could, however, benefit from a slightly lower transmission cost, according to the brokerage.

Street View

Post the announcement, brokerages turned negative on Gujarat State Petronet, changing ratings and cutting the stock's 12-month price target.

Nomura downgraded the stock's rating from a 'buy' to a 'reduce'. The brokerage not only cut the price target to Rs 320, which implies a 15% downside, it also cut its FY25/26 Ebitda estimates by 37%/42%.

Kotak Securities Ltd. also downgraded the stock to 'reduce' with Rs 360 fair value, implying a 22% downside to the previous close. While the brokerage did expect a 20–30% tariff cut on higher actual volumes, the result was far beyond the brokerage's expectations. Kotak also cut its FY25/26 earnings estimates by 28%/37% and expects the return on capital employed to decline sharply to 11–12%, compared to the average 24% over FY19–23.

Of the 26 analysts tracking the company, 13 maintain a 'buy' rating, four recommend a 'hold' and nine suggest a 'sell', according to Bloomberg data. The average 12-month analysts' return potential of the stocks stands at 22.4%.