Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Gujarat Gas Company: Growth at reasonable valuations
Gujarat Gas (GujGas) reported a strong performance
during 9MCY10 on the back of availability of spot LNG
at reasonable prices. Given the strong demand
dynamics in its areas of operations, we believe the
company would report over 18.0% YoY volume jump in
CY10 (Q4CY10 results are awaited) vs 4.9% decline in
CY09. The company recently hiked the price of gas that
it sells to its industrial customers, and also CNG and
PNG rates. GujGas has secured gas supplies by signing a
medium-term LNG contract (in addition to RIL’s KG-D6
allocation) with sister concern BG India Energy
Solutions Pvt Ltd (BGIEPL). We believe the availability of
spot LNG in the global market would ease supply
bottlenecks and result in volume growth. With its ability
to pass on input cost pressures, GujGas is well
positioned to maintain its operating margins and thus
profitability.
Supply constraints mitigated: GujGas received an
allocation of 0.6mmscmd from Reliance Industries’
(RIL) KG-D6 fields in April 2010. In Sept 2010, the
company entered into a medium-term sourcing
contract with BGIEPL for 0.5mmscmd of LNG. These
new contracts have strengthened the sourcing
portfolio of GujGas
Potential to distribute over 4.0mmscmd: GujGas’
existing geographies offer a potential of over
4.0mmscmd (current distribution volume is about
3.5mmscmd). The company is investing over Rs1.5bn
annually to further expand its network thus covering
additional geographies. We believe that these
investments would create further potential for volume
growth.
Reasonable valuations, initiate with a Buy: With
firm sourcing contracts in place, GujGas is well poised
to deliver growth over the next 2-3 years. Spot LNG
availability has also improved in global market which
would further aid volume growth. The stock is trading
at 16.6x and 14.6x our CY11E EPS of Rs19.9 and CY12
EPS of Rs22.5 respectively and 3.7x and 3.1x CY11E
and CY12E P/ BV. Based on the visibility and growth
we recommend Buy with a target price of Rs383 (17x
CY12E EPS of Rs22.5 and 3.5x CY12E P/BV)
Investment Rationale
Firm availability from RLNG, KG-D6 to further reinforce sourcing
GujGas’ distribution volumes received a fillip on account of increased availability of re-gasified
liquefied natural gas (RLNG) from H2CY09 onwards. Since, then the company has been sourcing
about 0.4-0.7mmscmd of RLNG to meet increasing demand from its customers. One of the prime
reasons of improved LNG availability is the newer LNG trains commencing operations in Qatar and
Algeria. Moreover, the Middle-East players are not entering into any long-term LNG supply which
has bolstered availability of spot LNG.
During 9MCY10, GujGas’ average distribution volumes stood at 3.3mmscmd. Spot LNG comprised
about 0.8mmscmd of this volume. During 2010, spot LNG prices were hovering at about US$6-
10/mmbtu. Demand for LNG surged as alternatives like naphtha were more expensive at US$13-
14/mmbtu. However, recently spot LNG prices have shot up to about US$10-12/mmbtu owing to
rise in crude oil prices (hovering at about US$98-100/bbl).
In the wake of growing demand, the company signed a short term spot LNG supply contract with
BG India Energy Solutions Pvt Ltd (BGIEPL) in July 2010. As per the agreement, GujGas received
0.6mmscmd RLNG on a firm basis between July and Sept 2010. GujGas further strengthened its
supplies by signing an additional agreement for supply of 0.5mmscmd RLNG from BGIEPL in Sept
2010 for Oct 2010 to Dec 2013.
GujGas has long been vying for increased gas allocation from the KG-D6 fields for its city gas
distribution (CGD) from the initial 5.0mmscmd allocation for CGD of the total 40.0mmscmd KG D6
allocation. However, due to priority sector allocations (power and fertilizer), the company didn’t
receive any allocation of the first 40.0mmscmd. In April 2010, it company received 0.6mmscmd
allocation from RIL KG D6. The company is expected to receive its allocation post ramp up of KG D6
from 60mmscmd to 80mmscmd.
Existing infrastructure can potentially absorb about 4.0mmscmd
GujGas has invested over Rs1.5bn annually during CY09 and CY10 to augment its infrastructure
network in its current areas of operation – Surat, Bharuch and Ankleshwar. Although, the company is
distributing about 3.4-3.5mmscmd natural gas in these areas, the latent demand is much higher.
The company’s existing infrastructure network can distribute about 4.0mmscmd of natural gas.
However, GujGas faces gas supply constraints and hence cannot fulfill the demand of these areas.
The company is awaiting RIL KG D6 supplies which can partially fulfill the demand from these areas.
Conversely, the company has been sourcing spot LNG to cater to the demand from these
geographies. This is demonstrated by sequential jump in distribution volumes from 3.26mmscmd in
Q2CY10 to 3.42mmscmd in Q3CY10. We believe that the company would be able to distribute about
3.50mmsmcd in Q4CY10 owing to restoration of volumes from domestic sources (PMT volumes
were affected in Q3CY10) and additional availability from spot LNG.
GujGas is expected to continue its capex in the existing geographies of about Rs1.5bn per annum
over the next couple of years. However, the capex may go up if the company is awarded new gas
distribution geographies (through PNGRB competitive bidding process).
Both the Delhi-Mumbai Industrial Corridor (DMIC) and Dedicated Freight Corridor (DFC) pass
through Gujarat. These two projects are expected to propel massive investments along the path of
these corridors which are expected to further fuel industrialization in the state of Gujarat. Over
US$30bn investments are slated to happen in the region which is expected to triple the industrial
output over the next five years. We believe that the industrialization would drive the natural gas
consumption which would be beneficial for GujGas which is largely catering to these customers.
Operating margins to sustain going forward
GujGas has been able to maintain its operating margins in the range of about 19-20% over the last
2-3 years by hiking prices at regular intervals. The company enjoys good pricing power and has
been able to pass on the cost hikes from purchases of natural gas to consumers without affecting
operating margins. In H1CY10, favorable exchange rate and lower spot LNG prices led to jump in
operating margins in excess of 20% (average margin in H1CY10 was 23.6% and 20.4% in H1CY09).
Margins declined to 17.8% in Q3CY10 owing to lower component of domestic gas and higher
component of spot LNG. Consequently, the company took price hike for its industrial retail
customers, which helped boost margins to 19-20% (our expectation for Q4CY10:19.7%).
Management has indicated that even if the margins vary on a sequential basis, they will be levelised
at about 19-20% on an annual basis.
In the past 6 months GujGas has made a series of price hike in CNG, PNG and industrial segment.
The first hike in CNG was made in September 2010 by 8.3% to Rs32.45/kg attributing to the
doubling of APM gas price from about US$2.0/mmbtu to US$4.2/mmbtu to support the upstream
companies. Recently the company hiked its CNG prices by Rs2.8/kg to Rs35.25/kg owing to the
increase in the purchase of imported RLNG to meet the gas demand. LNG prices are linked to crude
prices and have increased substantially in the recent past. The company also hiked gas prices for
industrial users by 16% in December 2010. PNG segment also witnessed a hike of 19% to Rs
17.30/kg effective from 1st Jan 2011. Subsequent hike in gas price has reinforced our belief that the
company would be able to maintain its operating margins.
Investment concerns
Delay in KG D6 supplies
Although, GujGas boasts of strong infrastructure network which can absorb over 4.0mmscmd
volumes, the company faces gas supply constraints. Supply issue is partially taken care by spot LNG
which the company is sourcing from past one year. However, spot LNG availability at reasonable
prices still remains uncertain with the prices recently moving up to US$10-12/mmbtu.
Although, the company has received 0.6mmscmd RIL KG D6 allocation, the same hasn’t started yet.
Hence, volumes growth may get affected due to delay in KG D6 supplies.
Rupee appreciation
Although, the sale of natural gas including PNG and CNG is denominated in rupee terms, GujGas’
natural gas supplies are dollar denominated. Hence, the exchange rate fluctuation impacts the
operating margins of the company. However, to support its operating margins, the company takes
price hike/ reduction once/ twice a year. But till the time such change takes place the operating
margins do get impacted.
Valuation
With a strong parentage of British Gas (BG), GujGas has been able to report consistent performance
over the past several years. The company has made substantial investments in augmenting its
infrastructure in its existing areas of operation. It is planning to invest over Rs1.5bn annually over the
next 2-3 years to further expand its network. Projects like DMIC and DFC which pass through Gujarat
are expected to bolster industrialization which is likely to generate demand for natural gas. We
believe GujGas with its expanded network is well placed to capitalize on such opportunities.
Earlier during CY07-09 GujGas volume growth was constrained due to no newer supplies from
domestic sources and availability of spot LNG at substantially higher prices. However, during CY10,
the scenario has undergone a sea change with spot LNG availability at reasonable prices as well as
allocation from RIL KG D6 (0.6mmscmd). The company was also able to secure medium term spot
LNG (0.5mmscmd) from its sister concern BGIEPL for a period of over 3 years. We believe spot
availability at reasonable prices along with future RIL KG D6 supplies to benefit GujGas’ volume
growth.
GujGas’ stock performance remained lackluster during 2007 till mid-2009 owing to concern over
volume growth. However, the performance received a fillip with spot LNG availability which was
further reinforced by RIL KG D6 allocation in early 2010. Volume growth concern is fading away with
the medium term spot LNG arrangement with BGIEPL. Additionally, KG D6 supplies (which may start
in early 2012) would aid volume growth. The company is sourcing additional spot LNG (apart from
medium term contract) to cater to the consumer demand. Incrementally, GujGas is poised to deliver
better performance on the back of volume growth. The stock is trading 16.6x and 14.6x our CY11E
EPS of Rs19.9 and CY12 EPS of Rs22.5 respectively and 3.7x and 3.1x CY11E and CY12E P/ BV. Based
on the visibility and growth we recommend Buy with a target price of Rs 383 (17x CY12E EPS of
Rs22.5 and 3.5x CY12E P/BV).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Gujarat Gas Company: Growth at reasonable valuations
Gujarat Gas (GujGas) reported a strong performance
during 9MCY10 on the back of availability of spot LNG
at reasonable prices. Given the strong demand
dynamics in its areas of operations, we believe the
company would report over 18.0% YoY volume jump in
CY10 (Q4CY10 results are awaited) vs 4.9% decline in
CY09. The company recently hiked the price of gas that
it sells to its industrial customers, and also CNG and
PNG rates. GujGas has secured gas supplies by signing a
medium-term LNG contract (in addition to RIL’s KG-D6
allocation) with sister concern BG India Energy
Solutions Pvt Ltd (BGIEPL). We believe the availability of
spot LNG in the global market would ease supply
bottlenecks and result in volume growth. With its ability
to pass on input cost pressures, GujGas is well
positioned to maintain its operating margins and thus
profitability.
Supply constraints mitigated: GujGas received an
allocation of 0.6mmscmd from Reliance Industries’
(RIL) KG-D6 fields in April 2010. In Sept 2010, the
company entered into a medium-term sourcing
contract with BGIEPL for 0.5mmscmd of LNG. These
new contracts have strengthened the sourcing
portfolio of GujGas
Potential to distribute over 4.0mmscmd: GujGas’
existing geographies offer a potential of over
4.0mmscmd (current distribution volume is about
3.5mmscmd). The company is investing over Rs1.5bn
annually to further expand its network thus covering
additional geographies. We believe that these
investments would create further potential for volume
growth.
Reasonable valuations, initiate with a Buy: With
firm sourcing contracts in place, GujGas is well poised
to deliver growth over the next 2-3 years. Spot LNG
availability has also improved in global market which
would further aid volume growth. The stock is trading
at 16.6x and 14.6x our CY11E EPS of Rs19.9 and CY12
EPS of Rs22.5 respectively and 3.7x and 3.1x CY11E
and CY12E P/ BV. Based on the visibility and growth
we recommend Buy with a target price of Rs383 (17x
CY12E EPS of Rs22.5 and 3.5x CY12E P/BV)
Investment Rationale
Firm availability from RLNG, KG-D6 to further reinforce sourcing
GujGas’ distribution volumes received a fillip on account of increased availability of re-gasified
liquefied natural gas (RLNG) from H2CY09 onwards. Since, then the company has been sourcing
about 0.4-0.7mmscmd of RLNG to meet increasing demand from its customers. One of the prime
reasons of improved LNG availability is the newer LNG trains commencing operations in Qatar and
Algeria. Moreover, the Middle-East players are not entering into any long-term LNG supply which
has bolstered availability of spot LNG.
During 9MCY10, GujGas’ average distribution volumes stood at 3.3mmscmd. Spot LNG comprised
about 0.8mmscmd of this volume. During 2010, spot LNG prices were hovering at about US$6-
10/mmbtu. Demand for LNG surged as alternatives like naphtha were more expensive at US$13-
14/mmbtu. However, recently spot LNG prices have shot up to about US$10-12/mmbtu owing to
rise in crude oil prices (hovering at about US$98-100/bbl).
In the wake of growing demand, the company signed a short term spot LNG supply contract with
BG India Energy Solutions Pvt Ltd (BGIEPL) in July 2010. As per the agreement, GujGas received
0.6mmscmd RLNG on a firm basis between July and Sept 2010. GujGas further strengthened its
supplies by signing an additional agreement for supply of 0.5mmscmd RLNG from BGIEPL in Sept
2010 for Oct 2010 to Dec 2013.
GujGas has long been vying for increased gas allocation from the KG-D6 fields for its city gas
distribution (CGD) from the initial 5.0mmscmd allocation for CGD of the total 40.0mmscmd KG D6
allocation. However, due to priority sector allocations (power and fertilizer), the company didn’t
receive any allocation of the first 40.0mmscmd. In April 2010, it company received 0.6mmscmd
allocation from RIL KG D6. The company is expected to receive its allocation post ramp up of KG D6
from 60mmscmd to 80mmscmd.
Existing infrastructure can potentially absorb about 4.0mmscmd
GujGas has invested over Rs1.5bn annually during CY09 and CY10 to augment its infrastructure
network in its current areas of operation – Surat, Bharuch and Ankleshwar. Although, the company is
distributing about 3.4-3.5mmscmd natural gas in these areas, the latent demand is much higher.
The company’s existing infrastructure network can distribute about 4.0mmscmd of natural gas.
However, GujGas faces gas supply constraints and hence cannot fulfill the demand of these areas.
The company is awaiting RIL KG D6 supplies which can partially fulfill the demand from these areas.
Conversely, the company has been sourcing spot LNG to cater to the demand from these
geographies. This is demonstrated by sequential jump in distribution volumes from 3.26mmscmd in
Q2CY10 to 3.42mmscmd in Q3CY10. We believe that the company would be able to distribute about
3.50mmsmcd in Q4CY10 owing to restoration of volumes from domestic sources (PMT volumes
were affected in Q3CY10) and additional availability from spot LNG.
GujGas is expected to continue its capex in the existing geographies of about Rs1.5bn per annum
over the next couple of years. However, the capex may go up if the company is awarded new gas
distribution geographies (through PNGRB competitive bidding process).
Both the Delhi-Mumbai Industrial Corridor (DMIC) and Dedicated Freight Corridor (DFC) pass
through Gujarat. These two projects are expected to propel massive investments along the path of
these corridors which are expected to further fuel industrialization in the state of Gujarat. Over
US$30bn investments are slated to happen in the region which is expected to triple the industrial
output over the next five years. We believe that the industrialization would drive the natural gas
consumption which would be beneficial for GujGas which is largely catering to these customers.
Operating margins to sustain going forward
GujGas has been able to maintain its operating margins in the range of about 19-20% over the last
2-3 years by hiking prices at regular intervals. The company enjoys good pricing power and has
been able to pass on the cost hikes from purchases of natural gas to consumers without affecting
operating margins. In H1CY10, favorable exchange rate and lower spot LNG prices led to jump in
operating margins in excess of 20% (average margin in H1CY10 was 23.6% and 20.4% in H1CY09).
Margins declined to 17.8% in Q3CY10 owing to lower component of domestic gas and higher
component of spot LNG. Consequently, the company took price hike for its industrial retail
customers, which helped boost margins to 19-20% (our expectation for Q4CY10:19.7%).
Management has indicated that even if the margins vary on a sequential basis, they will be levelised
at about 19-20% on an annual basis.
In the past 6 months GujGas has made a series of price hike in CNG, PNG and industrial segment.
The first hike in CNG was made in September 2010 by 8.3% to Rs32.45/kg attributing to the
doubling of APM gas price from about US$2.0/mmbtu to US$4.2/mmbtu to support the upstream
companies. Recently the company hiked its CNG prices by Rs2.8/kg to Rs35.25/kg owing to the
increase in the purchase of imported RLNG to meet the gas demand. LNG prices are linked to crude
prices and have increased substantially in the recent past. The company also hiked gas prices for
industrial users by 16% in December 2010. PNG segment also witnessed a hike of 19% to Rs
17.30/kg effective from 1st Jan 2011. Subsequent hike in gas price has reinforced our belief that the
company would be able to maintain its operating margins.
Investment concerns
Delay in KG D6 supplies
Although, GujGas boasts of strong infrastructure network which can absorb over 4.0mmscmd
volumes, the company faces gas supply constraints. Supply issue is partially taken care by spot LNG
which the company is sourcing from past one year. However, spot LNG availability at reasonable
prices still remains uncertain with the prices recently moving up to US$10-12/mmbtu.
Although, the company has received 0.6mmscmd RIL KG D6 allocation, the same hasn’t started yet.
Hence, volumes growth may get affected due to delay in KG D6 supplies.
Rupee appreciation
Although, the sale of natural gas including PNG and CNG is denominated in rupee terms, GujGas’
natural gas supplies are dollar denominated. Hence, the exchange rate fluctuation impacts the
operating margins of the company. However, to support its operating margins, the company takes
price hike/ reduction once/ twice a year. But till the time such change takes place the operating
margins do get impacted.
Valuation
With a strong parentage of British Gas (BG), GujGas has been able to report consistent performance
over the past several years. The company has made substantial investments in augmenting its
infrastructure in its existing areas of operation. It is planning to invest over Rs1.5bn annually over the
next 2-3 years to further expand its network. Projects like DMIC and DFC which pass through Gujarat
are expected to bolster industrialization which is likely to generate demand for natural gas. We
believe GujGas with its expanded network is well placed to capitalize on such opportunities.
Earlier during CY07-09 GujGas volume growth was constrained due to no newer supplies from
domestic sources and availability of spot LNG at substantially higher prices. However, during CY10,
the scenario has undergone a sea change with spot LNG availability at reasonable prices as well as
allocation from RIL KG D6 (0.6mmscmd). The company was also able to secure medium term spot
LNG (0.5mmscmd) from its sister concern BGIEPL for a period of over 3 years. We believe spot
availability at reasonable prices along with future RIL KG D6 supplies to benefit GujGas’ volume
growth.
GujGas’ stock performance remained lackluster during 2007 till mid-2009 owing to concern over
volume growth. However, the performance received a fillip with spot LNG availability which was
further reinforced by RIL KG D6 allocation in early 2010. Volume growth concern is fading away with
the medium term spot LNG arrangement with BGIEPL. Additionally, KG D6 supplies (which may start
in early 2012) would aid volume growth. The company is sourcing additional spot LNG (apart from
medium term contract) to cater to the consumer demand. Incrementally, GujGas is poised to deliver
better performance on the back of volume growth. The stock is trading 16.6x and 14.6x our CY11E
EPS of Rs19.9 and CY12 EPS of Rs22.5 respectively and 3.7x and 3.1x CY11E and CY12E P/ BV. Based
on the visibility and growth we recommend Buy with a target price of Rs 383 (17x CY12E EPS of
Rs22.5 and 3.5x CY12E P/BV).
No comments:
Post a Comment