Long-term gas contract signed with BG
• Gujarat Gas (GGAS) signs 3.5-year R-LNG contract with BG. BG to
start supplying 0.5mscmd gas from October 2010.
• Deal would cut down GGAS’s reliance on spot LNG purchases, so
we view it positively.
• Undersupplied industrial markets improve GGAS’s ability to retain
margins at around Rs4/scm.
• We maintain CY09-12ii earnings CAGR estimate at 20%. BUY.
GGAS signs mid-term R-LNG contract with BG: In the first such deal
by a private gas distribution company in India, GGAS has concluded a
3.5-year agreement to source 0.5mscmd (15% of CY10ii volumes) of RLNG
from its parent BG. Gas supplies would commence from 1st October
2010. We estimate delivered price of gas at US$8-9/mmbtu. Through
CY05-09, GGAS’s gas volumes were flat at ~2.8mscmd owing to supply
constraints, so from CY10 the company had stepped up spot purchases
to grow volumes. The deal would help GGAS reduce its reliance on spot
gas from the present ~20% to ~10% in CY11.
Expect margins to be maintained: GGAS has already signed back-toback
agreements with some of its ~750 existing industrial consumers
and around 50 new consumers. Given the undersupplied market (supply
of 3.5mscmd vs demand of >5msmcd), we think GGAS is well-placed to
pass on fluctuations in gas prices and maintain its spread/unit at ~Rs4.
Management has indicated that it would continue to look for more such
deals over the next 12-24 months to increase its long-term gas portfolio
for existing as well as new circles.
In a “sweet spot”; we retain BUY: We reiterate that GGAS is in a
“sweet spot”, given undersupplied industrial markets and its wellestablished
supply network. We maintain our CY09-12ii earnings CAGR
estimate of 20%. While Gujarat Gas’s valuation, at 19x CY11ii EPS, is at
par with regional peers, we think the stock offers a thematic play on the
gas retailing business that is set for a massive take off. We retain BUY.
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