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Gujarat State Petronet shares hit 20% lower circuit; brokerage cut targets. Here's why?

Gujarat State Petronet shares hit 20% lower circuit; brokerage cut targets. Here's why?

Shares of Gujarat State Petronet were locked in the seller's circuit at Rs 302.30, down 20 per cent for the day, commanding a total market capitalization of slightly abover Rs 17,000 crore.

Pawan Kumar Nahar
Pawan Kumar Nahar
  • Updated Apr 22, 2024 10:07 AM IST
Gujarat State Petronet shares hit 20% lower circuit; brokerage cut targets. Here's why?Petroleum and Natural Gas Regulatory Board (PNGRB) came out with a new tariff order for the GSPL’s high-pressure pipeline which has seen a massive cut of 46.8 per cent.

Shares of Gujarat State Petronet Ltd (GSPL) hit a lower circuit of 20 per cent during the early trading session on Monday after the company saw a series of downgrades by brokerage firms after new tariff order led to a sharp earnings cut.

Petroleum and Natural Gas Regulatory Board (PNGRB) came out with a new tariff order for the GSPL’s high-pressure pipeline which has seen a massive cut of 46.8 per cent from the current tariff to Rs 18.1 per  million British thermal units (mmbtu). New tariff has seen a two-year delay and would be effective from May 1, 2024.

Following the news, shares of Gujarat State Petronet were locked in the seller's circuit at Rs 302.30, down 20 per cent for the day, commanding a total market capitalization of slightly above Rs 17,000 crore. The scrip had settled at Rs 377.85 in the previous trading session on Friday.

A 47 per cent tariff cut was significantly below expectations of about 15-20 per cent cut which was largely attributed to higher future volume assumptions. However, due to a significant delay in new tariff order we were modeling flattish tariff earlier, said Systematix Institutional Equities, which has cut Ebitda estimates by 43-47 per cent from earlier assumption led by new tariff order.

"We continue to forecast a volume of 31 and 32.6mmscmd for FY25E and FY26E, respectively, rising from 29.5mmscmd in FY24E. We, therefore, cut our target price to Rs 309 from earlier Rs 350 and downgrade the stock to 'sell' from 'hold' earlier, it said. "However, the company may challenge the order which could further delay the actual tariff cut," Systematix added.

In a much-delayed tariff order, PNGRB has cut GSPL’s HP network by a sharp 47 per cent. Approved tariff is 64 per cent lower versus the Rs51 per cent mmbtu tariff sought by GSPL, said Kotak Institutional Equities. "We believed that there was a case for a tariff cut of 20-30 per cent due to higher actual volumes and delays," it said.

PNGRB’s assumption of a much higher future volumes divisor is rather perplexing and contrary to past practices. We expect GSPL to challenge this order, it said. "A tariff cut reduces FY2025 and 26E earnings by 28 per cent and 37 per cent, respectively and RoCE will decline sharply to 11-12 per cent," Kotak added, downgrading the stock to 'reduce' with a fair value target of Rs 360.

The decision of tariff cut is a major disappointment, said Motilal Oswal Financial Services, which was building in a tariff decline of 15 per cent YoY in FY25, while the actual decline in tariff for the HP gas grid stands at 47 per cent. "At this revised tariff, our FY25-26E EPS will see a sharp reduction of 40-45 per cent," it said.

"The target price impact will likely be lower as the core business accounts for only Rs 180 share out of our target price of Rs 450.
We have a BUY rating on the stock.Our earnings estimates are currently under review," it added.

Among the global brokerage firms, CLSA and Citi have downgraded the stock to 'sell' with target price of Rs 330 and 295, respectively. However, Nomura remains positive on the stock with a buy rating and a revised target price of Rs 320 on the stock.

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Disclaimer: Business Today provides stock market news for informational purposes only and should not be construed as investment advice. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.
Published on: Apr 22, 2024 10:07 AM IST
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