Broker's call: Gujarat State Petronet (Buy)

Target: ₹400

CMP: ₹285.55

Gujarat State Petroleum has a 54 per cent stake in Gujarat Gas, which amounts to a market capitalisation of ₹19,700 crore, much higher than its m-cap of ₹15,600 crore. Major concerns for the above anomaly have been: a) expected decline in tariffs of GSPL due to over-utilisation of the High Pressure grid, and b) concerns over the usage of cash. Gujarat State Petroleum Corporation (GSPC), the parent company of GSPL with a 37.6 per cent stake, has traditionally been a debt ridden company, raising concerns whether the cash generated by GSPL may be used to reward minority shareholders. GSPC’s tryst with upstream investments has not been successful, resulting in its standalone/consolidated net debt rising to a peak of ₹23,400 crore/₹27,700 crore in FY17. 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 ₹26,200 crore in FY17 to ₹7,600 crore in FY20.

The management targets to become debt free in the next 3-4 quarters. It could reward shareholders by increasing its dividend payout from nearly 12-13 per cent at present (the company has an interest cost of about ₹100 crore – similar to dividend payments). At a 25 per cent holding company discount, the 54 per cent stake in Gujarat Gas provides a valuation of ₹275/share to GSPL. We value GSPL standalone operations at 7x to arrive at our Target Price of ₹400/share (core business continues to trade for free) and reiterate Buy.