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Gujarat Gas – 3QCY2010 Results Update
Angel Broking recommends an Accumulate on Gujarat Gas with a Target Price of Rs418.
Gujarat Gas’s (GGAS) 3QCY2010 numbers came in line with our expectation on
the bottom-line front, which increased 27% yoy to `56cr (`44cr) as against our
expectation of `57cr. Gross gas spread fell to `3.7/scm from the all-time high of
`4.3/scm registered in 1QCY2010 and `4/scm registered in 2QCY2010. We
recommend an Accumulate rating on the stock.
Gross gas spread hit by higher gas cost on qoq basis: For 3QCY2010, GGAS
reported top-line growth of 30.7% yoy to `507cr (`388cr) as against our
expectation of `442cr. Average realisations increased to `15.8/scm (`13.5/scm)
as against our expectation of `14/scm. Sequentially, gross spread took a hit
during the quarter at `3.7/scm (a fall below `4/scm after it was first registered in
4QCY2009) on account of higher cost of gas procured (due to full impact of
increase in APM gas price and higher proportion of LNG in the gas sourcing
portfolio) coupled with the 1.9% qoq rupee depreciation. However, gross gas
spread increased 8.3% yoy to `3.7/scm `3.5/scm. EBITDA/scm, in line with gross
gas spread, also stood higher yoy at `2.9/scm (`2.5/scm).
Outlook and Valuation: GGAS volumes were supported by higher gas flow from
RLNG (around 50% of total gas sourced) due to the force majeure situation at
Panna and Mukta fields. Going ahead, we expect RLNG prices to remain
subdued owing to which RLNG volume would be robust. Increase in domestic
(gas flow from KG-D6) and RLNG volumes would be the future growth drivers for
GGAS and soften supply-side constraints. We have rolled over to CY2012 and
recommend an Accumulate on the stock, with a Target Price of `418.
RLNG off-take spiked on lower domestic gas supply due to shutdown at Panna and
Mukta field: Gas sourcing mix during the quarter saw a significant shift with LNG
becoming the pre-dominant source (50% of gas sourced) of gas supply for the
company after the Panna and Mukta fields were shut from July 20, 2010 till the
end of the 3QCY2010. This was the highest ever LNG procurement by the
company in a quarter. RLNG off-take during the quarter stood at ~1.7mmscmd
(includes the firm LNG contract for 0.6mmscmd entered with BGIES for July,
August and September) compared to 0.3-0.4mmscmd of LNG procured by the
company over the last two quarters. PMT volumes during the quarter decreased by
almost half on a qoq basis and stood at ~0.9mmscmd (1.8mmscmd). However,
on a yoy basis, gas distribution volumes grew on higher RLNG volume off-take. It
increased by 12.1% yoy to 315mmscm (281mmscm), which was marginally higher
than our expectation of 310mmscm. More than 6,800 vehicles were converted to
CNG during the quarter, taking the total number of CNG vehicles now plying on
natural gas in the company’s markets to more than 126,000. No new CNG
stations were added during the quarter because of some procedural delays.
OPM contracts by 47bp yoy and 449bp qoq to 17.8%: Sequentially, the
company’s OPM dipped by 449bp to 17.8% (22.3%) mainly on account of the
decrease in the gross gas spread (selling price minus the gas cost), which fell to
`3.7/scm from a spread of `4/scm registered in 2QCY2010. This was on account
of the full impact of increase in APM gas price (w.e.f May 20, 2010) and increase
in costs due to higher proportion of LNG procured during the quarter. Adding to
woes was the 1.9% rupee depreciation during the quarter.
On a yoy basis, the company’s OPM declined by 47bp despite higher gross gas
spread at `3.7/scm (`3.5/scm) on account of higher top-line registered during the
quarter due to pass through of relatively costly LNG to the industrial retail
customers. Thus, EBITDA/scm in line with gross gas spread stood higher yoy at
`2.9/scm (`2.5/scm). Operating expenditure during the quarter increased 7.8%
yoy to `36.1cr (`33.5cr), wherein staff costs moved up 5.7% yoy to `13cr (`12.3cr)
and other operating expenditure increased 9.0% yoy to `23.1cr (`21.2cr). Higher
top-line and increase in EBITDA/scm resulted in EBITDA increasing 27.3% yoy to
`90cr (`71cr), which was marginally lower than our expectation of `94cr.
Investment Arguments
Supply-side woes receding on improving domestic gas availability and LNG
playing a crucial role: The company registered steady growth in volume over the
last one year following improving availability of gas in the country and subdued
RLNG prices. We expect the uptrend to continue, however there have been some
delays in receiving gas from KG-D6 on account of slow ramp up of gas
production. Nonetheless, the company is ensuring that the shortfall in volume is
compensated with higher RLNG procurement. It recently re-entered into a firm
RLNG agreement with BG India Energy Solutions Pvt. Ltd. (BGIES) for the supply of
0.5mmscmd for a longer period of 39 months following expiry of short-term RLNG
contract of 0.6mmscmd for the months of July, August and September 2010. The
company continues to explore entering into such long-term RLNG contracts.
Increase in the domestic LNG import capacity along with subdued LNG prices
would further improve matters. We have factored in 1mmscmd and 1.15mmscmd
of R-LNG volumes flow for CY2011 and CY2012, respectively. Thus, inclusion of
R-LNG and KG gas in the company’s sourcing mix will reduce the concentration
risks associated with sourcing from the PMT (65% in CY2009).
Gross gas spread on uptrend: Gross gas spread during CY2009 edged higher as
the company provided large proportion of its incremental gas to the high-margin
industrial retail customers. Thus, the company's profitability has been improving
with its focus shifting to the high-margin retail business from bulk customers
(decreased from 30.1% in CY2006 to 13.1% in CY2008). Going ahead, we expect
bulk volumes to be nil. We expect gross gas spread to increase going ahead to
`4.14/scm and `4.32/scm in CY2011 and CY2012, respectively. This could
further improve on account of favourable exchange rate.
Capex on track in existing areas: Pending PNGRB authorisation for the company’s
existing areas of operation (Surat, Bharuch and Ankleshwar) has not thwarted the
company’s expansion plans in these areas. The company plans to spend around
`140-150cr each in CY2011 and CY2012 to enhance capacity in the areas. This
will ensure that growth continues with expansion of infrastructure. Besides this, the
company is also assessing some new areas opened for bidding by the PNGRB in
the third round.
Outlook and Valuation
GGAS volume during the quarter was supported by higher gas flow from LNG on
account of the force majeure situation at Panna and Mukta fields. Thus, reliance
on RLNG has increased to the extent to support the company’s volume growth.
During the quarter, RLNG constituted around 50% of total volumes. We expect
RLNG prices to remain subdued going ahead owing to which RLNG volume flow is
expected to be robust in the ensuing quarters. The company has also renewed the
contract with the BGIES for 0.5mmscmd of firm supply for a period of 39 months
(from October 2010 for December 2013) to meet its growth requirements. The
company continues to explore entering into such long-term RLNG contracts. It has
received allocation of 0.6mmscmd of KG-D6 gas from the Government of India
on a fallback basis, and is in discussion with the suppliers and transporters to
finalise agreements for flowing this gas into its system. Thus, going ahead,
increase in domestic volumes (gas flow from KG-D6) and RLNG volumes would be
growth drivers for the company as well as soften the supply-side constraints. The
company’s CNG segment has been clocking healthy growth and increasing its
share in the volume matrix. More than 126,000 natural gas vehicles are now
plying in the company’s markets.
In 3QCY2010, the gross gas spreads fell to `3.7/scm from the all-time high of
`4.3/scm registered in 1QCY2010. We believe it was a one-off fall in spread as
the company tried to maintain its volume growth by procuring large quantities of
relatively costly LNG on account of the shutdown at the Panna and Mukta fields.
We expect gross gas spread to increase going ahead to `4.14/scm and `4.32/scm
in CY2011 and CY2012, respectively. This could further improve on account of
favourable exchange rate.
GGAS still awaits authorisation from the PNGRB for its areas of operations in the
cities of Surat, Bharuch and Ankleshwar. However, with the notification of Section
16 by MoPNG w.e.f July 15, 2010, the company expects to receive authorisation
from PNGRB for its areas of operation soon. Nevertheless, pending this
authorisation, the company’s expansion plans have not been thwarted as it
continues to carry out expansion in the existing areas of operations. In CY2009,
the company incurred capex of `155cr towards network expansion and
infrastructure upgradation and is awaiting clearance from the regulatory
authorities before venturing into new areas as per its plan. The company has filed
an expression of interest application to operate in certain areas of Kutch and
Bhavnagar.
GGAS has a strong balance sheet with cash and investments worth `436cr as on
1HCY2010, which could be used for building infrastructure in new cities or for
higher dividend payouts. We expect the company’s net sales to post 19.8% CAGR
over CY2009-12 to `2,438cr and EPS to register 19.6% CAGR to `23.2 over the
same period. At current levels, the stock is trading at 18.8x and 16.1x its CY2011E
and CY2012E earnings, respectively. We have rolled over to CY2012 and
recommend an Accumulate on the stock, with a Target Price of `418.
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