Gujarat Gas Company Ltd. – BUY-Going goes strong:: IIFL

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Going goes strong

Normalisation of supplies from the Panna-Mukta-Tapti JV, which accounts for ~55% of Gujarat Gas’s
(GGAS) gas purchases, should reduce its expensive spot RLNG purchases. This bodes well for
expansion in its gross spread/scm in 4QCY10. As highlighted in our recent report High on gas, GGAS
is well-placed to benefit from a pick-up in gas availability in India. We forecast GGAS’s earnings will
grow at 20% annually through CY09-12ii, even without factoring in geographical diversification. As
it happens, GGAS is increasingly aggressive in geographical expansion, and has submitted an EoI for
Bhavnagar. A debt-free balance sheet supports management’s expansion plans. A possible price
increase for industrial consumers is a key near-term trigger for the stock. We retain BUY.


Normalisation of PMT supplies bode well for margin expansion: Of the 3.5mscmd of gas purchased
by GGAS in CY10, 55% was sourced from PMT. However, in 3QCY10, a forced outage resulted in PMT
supplies falling to 50% of the normal, compelling GGAS to purchase R-LNG. Despite such adverse operating
conditions, GGAS passed the increase and grew spread/scm by 8% YoY to Rs3.7—which highlights its pricing
power. Normalisation in supplies should allow its spread to further grow QoQ to around Rs4/scm.

Due for a price increase: GGAS’ base prices to its industrial consumers have remained unchanged for the past
22 months—while APM gas prices have doubled, and other suppliers in Gujarat have increased their rates. As such,
we believe GGAS will increase base rates to its industrial consumers. In this context, it is worth noting that latent
demand in GGAS’s operating area is around 5-5.5mscmd, as against the supply of 3.5mscmd.

Eyeing geographical diversification: As highlighted in our printed report High on gas, PNGRB aims to appoint
200 CGD (city gas distribution) operators by 2015. GGAS has taken the lead and submitted EoI to develop a CGD
business in Bhavnagar, and is also exploring opportunities in Kutch and Vapi. We forecast GGAS’ earnings CAGR at
20% through CY09-12ii even without these expansions, making it a thematic play on the CGD business in India.