GSPL with a focussed business model, worth a buy
The Gujarat State Petronet Ltd. (GSPL) stock has been very active in the last couple of weeks. It has gained about 20 per cent from the low of Rs 51 that it touched on March 19 even as other mid-cap stocks are languishing.
The stock had earlier undergone a drastic correction, halving in value from its high of Rs 109, registered in January, before the recovery over the last two weeks. At the current market price of Rs 63, the stock can be bought by investors willing to wait for returns over the medium term.
GSPL has a focussed business model as a transporter of natural gas in Gujarat without any exposure to commodity price risk. It is well-positioned in the Gujarat gas market with its pipelines connecting gas sources to existing and developing markets. GSPL is also venturing into city gas distribution through investment in group companies engaged in the lucrative and growing business.
However, the investment in rapid expansion of pipeline network is beginning to show up on the company’s financials. Rising interest cost and depreciation charge are exerting pressure on profit growth. Besides, the regulatory policy on pipeline transportation and city gas distribution is evolving and is a risk to be taken note of.
GSPL is fortunate to be in the right place at the right time. The mature gas market of Gujarat is set to witness all the action when Reliance Industries starts pumping out its KG Basin gas later this year. The company now transports about 18 million metric standard cubic metres of gas a day (MMSCMD) but this will double with volumes from just two contracts.
GSPL has signed a 15-year agreement with Reliance to transport 11 MMSCMD and another one with Torrent Power to transport 4.5 MMSCMD for 20 years. The long-term agreements lend visibility on usage of capacity and on revenues.
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