Gujurat Gas: Higher RLNG supply to depress margins: Avendus

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GGAS’ net profit increased 26% y‐o‐y, but declined 2.4% q‐o‐q in
3Q2010. Volume increased 12% y‐o‐y and 6% q‐o‐q on higher supply of
Regasified LNG. Revenues increased c31% on the rise in the proportion
of costlier RLNG. Reduction in interest cost aided the increase in PAT.
EBITDA margins declined from 18.2% in 3Q2009 to 17.8% in 3Q2010.
Net margins declined by 50‐bp to 11.1%. Volumes are likely to grow on
account of the new contract of 0.5mmscmd short‐term RLNG supply.
However, the average gas cost increase is likely to lead to margin
compression. We have raised our revenue estimates by c10% for 2010f
and by 9.3% each for 2011f and 2012f, while the EPS estimates have
been lowered by c15% for 2010f and 2011f and by c17% for 2012f. We,
thus, lower our Sep11 target price from INR491 to INR448, but
maintain our Add rating on the stock.




Volumes increase by 12% on higher RLNG offtake
GGAS’ volumes increased from 281 million cubic meters (mcm) in the Sep09
quarter to 315mcm in the Sep10 quarter. The increase in volumes was
essentially on account of the increase in Regasified LNG (RLNG) offtake. On
sequential basis, volumes increased by 6.1%. As a force majeure affected
supplies from a large supplier, RLNG made up a significant portion of the
sourcing portfolio. Gas sales volume increased due to addition of 6,800 CNG
vehicles during the quarter.
EPS rises by 26%, while PAT margin declines by 50‐bp
GGAS reported net profit of INR564mn in 3Q2010 as against INR449mn in
3Q2009. The increase in PAT can be attributed to the 12.1% increase in volume
and the increase in retail CNG and PNG prices. Also, interest cost has declined
by c20%. On sequential basis, PAT declined marginally on higher raw material
costs (on account of higher proportion of RLNG). EBITDA margin declined
sharply on account of higher raw material costs.
New short‐term RLNG contract to boost volumes further
GGAS has signed a contract for supply of 0.5mmscmd of RLNG for a 39‐month
period starting 1 Oct10. This contract is likely to be a spot LNG contract; hence,
the final LNG price for GGAS is likely to be USD8.5/mmbtu. Volumes have
already risen to 3.4mmscmd, and with a new contract in place we estimate
volumes to increase to 3.6mmscmd in 4Q2010f. The new contracted LNG is
likely to substitute some spot LNG. However, higher RLNG volumes are likely to
lead to a reduction in margins. On the back of higher gas cost, we have lowered
our EPS estimates for 2010f and 2011f by 15% each and for 2012f by c17%.
Lower target price to INR448; maintain Add
Based on the decline in earnings forecasts for 2010, 2011 and 2012, the Sep11
DCF‐based target price has been lowered from INR491 to INR448. We maintain
our Add rating on the stock.