Gujarat State Petronet outlook turns weak: Should you sell GSPL stock?

Shares of Gujarat State Petronet Ltd plunged 19 per cent on Monday following the PNGRB's pipeline tariff review for the PSU's High Pressure Gujarat Gas Grid Network. The regulated tariff was set 47 per cent lower than Rs 34 per mmBtu, at Rs 18.1 per mmBtu, which will be effective from May 1. It was a far call from the Rs 50.80 mmBtu sought by GSPL.

 A few brokerages cut their FY25 earnings estimates by up to 45 per cent following the PNGRB review. Many of them have downgraded the stock to ‘Reduce’, even as they see GSPL to be a key beneficiary of additional LNG to be imported to bridge the demand-supply gap in India.

ICICI Securities said the regulator seems to have disagreed materially with the GSPL on almost all tariff parameters, cutting assumptions on capex, opex and applicable volumes, driving the steep change.

"While Gujarat State Petronet may choose to appeal the sharp cuts and ask for a review/revision etc., prima facie this is a material hit to earnings for GSPL. Applying this revised tariff to FY25–26E implies a massive 44–45 per cent reduction to FY25/26E EPS against previous estimates with a relatively lower cut to target price due to appreciation in Gujarat Gas' stock price," it said while suggesting a 'Sell' on the stock with a revised target price of Rs 304 from Rs 395.

Emkay Global said it has downgraded the stock to 'Reduce' from 'Buy', as the long-awaited HP grid tariff revision came as a major negative surprise. It noted that the effective cut against FY19 blended book rate is hence 37 per cent.

"PNGRB’s assumptions deviated on future capex, volume divisor & opex against GSPL’s, while the prospective impact was Rs 11/mmbtu versus earlier rate. FY25/26E standalone earnings hence get cut 16 per cent/21 per cent and the DCF-SOTP based target price clipped by Rs 45 per share (11 per cent), to Rs 370 per share (with rollover to Mar-26)," it said.

Nuvama said GSPL is a key beneficiary of additional LNG to be imported to bridge the demand-supply gap in India. "We forecast rapid growth given volume visibility but a 47 per cent tariff cut to Rs 18.1/mmBtu leads to a cut in our FY25E/26E EBITDA by 42 per cent/40 per cent; we cut target price by 30 per cent to Rs 288 (earlier: Rs 408). Downgrade to REDUCE from BUY," it said.

PL has a contra bet. It upgraded its rating from ‘Accumulate’ to ‘Buy’, as it sees no further negatives for the stock. This brokerage has a target price of Rs 392 on GSPL based on 10 times FY26 adjusted EPS of Rs 12 and adding the value of its stake in Gujarat Gas and Sabarmati Gas at 25 per cent holding company discount.

The GSPL management is studying the order, though given inordinate delays and the tariff model’s long-term nature, the outlook has turned weak despite tailwinds like lower LNG price, Emkay Global said.