Accumulate Gujarat Gas – 4QCY2010 Result; Target Rs. 418- Angel Broking

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Gujarat Gas – 4QCY2010 Result Update

Angel Broking recommends an Accumulate on Gujarat Gas with a Target Price of Rs. 418.

Gujarat Gas’s (GGAS) 4QCY2010 numbers exceeded our expectations on the

bottom-line front, which increased 79% yoy to `82cr (`46cr) v/s our estimate of

`54cr. Gross spread spike to `5.4/scm during the quarter. We recommend an

Accumulate on the stock.

Gross spread jumps on higher realisation and lower average gas cost: For

4QCY2010, GGAS reported top-line growth of 33% yoy to `514cr (`386cr) as

against our expectation of `488cr. Average realisations increased to `16.3/scm

(`13.8/scm) during the quarter. Gross spread spiked to `5.4/scm during the

quarter on account of higher realisation and lower cost of gas procured

sequentially due to restart of PMT field after the shutdown, thus decreasing

reliance on relatively costlier LNG volumes.

Outlook and Valuation: GGAS volume during the quarter was supported by

higher gas flow from PMT. Thus, reliance on RLNG decreased to an extent to

support the company’s volume growth and margin. However, we expect the

company to resort to RLNG for incremental growth, which would stabilise margins

going forward. Besides volume growth, to maintain margins, the company plans

to price its gas to its various consumers taking into consideration the pricing of the

alternative fuels. We believe that through this strategy, the company will be able

to maintain volume growth and margins going ahead. Thus, we recommend an

Accumulate on the stock, with a Target Price of `418.

Top-line up 33% driven by higher realisations: For 4QCY2010, GGAS reported

top-line growth of 33% yoy to `514cr (`386cr) as against our expectation of

`488cr. Top-line growth was driven by increase in average realisations to

`16.3/scm (`13.8/scm) during the quarter. Average realisations came in higher

owing to the CNG price hike effected over the last one year and increase in price

to the industrial retail customers. Realisations increased sequentially too due to

similar reason.

RLNG off-take reduces sequentially on re-start of PMT field: Gas sourcing mix

during the quarter saw lesser reliance on LNG, as supply from the PMT field

increased due to re-start of its operations. Thus, reliance on LNG decreased to that

extent to support its growth. However, on a yoy basis, gas distribution volumes

grew on higher RLNG volume off-take. It increased by 12.8% yoy to 309mmscm

(274mmscm). More than 8,800 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 135,000.

OPM expands by 527bp yoy and 737bp qoq to 25.2%: Sequentially, the

company’s OPM expanded by 737bp to 25.2% (17.8%) mainly on account of the

increase in the gross spread, which spiked to `5.4/scm during the quarter. This

was on account of higher realisation and lower gas cost due to increase in the

proportion of PMT gas procured during the quarter. We had assumed higher LNG

off-take and thus gas cost was much lower than our expectation. Similarly, on yoy

basis, OPM expanded by 527bp. Operating expenditure during the quarter

increased 10.5% yoy to `46cr (`41.6cr), wherein staff costs moved up 16.7% yoy

to `14.2cr (`12.2cr) and other operating expenditure increased 8.0% yoy to

`31.8cr (`29.5cr). Thus, higher top-line and better operating performance resulted

in EBITDA increasing by 68.2% yoy to `129.3cr (`76.9cr), which was higher than

our expectation of `92cr.

Depreciation, interest costs in line: Depreciation moved up 11.9% yoy to `14.2cr

(`12.7cr) due to investments in the pipeline network, CNG and other infrastructure

during the year. Since the company utilises internal cash accruals to meet its

working capital requirements and for expansions, interest costs were negligible.

Higher operating profit boosts PAT by a substantial 78.5%, beats our expectation:

Other income increased 23% yoy to `7.7cr (`6.3cr), while the effective tax rate

stood lower at 32.8% (34.3%). Thus, bottom-line increased by 78.5% yoy to `82cr

(`46cr) and was much higher than our expectation of `54cr.

Investment Arguments

Supply-side woes receding on improving domestic gas availability and LNG

playing a crucial role: Over the last one year, the company registered steady

growth in volumes following improving availability of gas in the country and

subdued RLNG prices. Although there have been some delays in receiving gas

from KG-D6 on account of slow ramp up of gas production, 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 for the

supply of 0.5mmscmd gas. The company continues to explore entering such longterm

RLNG contracts. Moreover, increase in the domestic gas availability (RIL,

along with BP, ramping up production from KG D6 from 50 to 80mmscmd) would

further improve matters.

Gross spread to stabilise: Gross 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 stabilize going ahead as

company is able to pass through its gas cost to industrial customers by pro-actively

pricing it taking into account the pricing of alternative fuels.

Outlook and Valuation

GGAS volume during the quarter was supported by higher gas flow from PMT as

the field re-started its operations following its shutdown. Thus, reliance on RLNG

decreased to an extent to support the company’s volume growth and margin.

However, we expect company to resort to RLNG for incremental growth, which

would stabilise margins going forward. The company has also entered into a firm

contract with BG to meet its growth requirements. The company continues to

explore entering into such long-term RLNG contracts and thus soften the supplyside

constraints. The company’s CNG segment has been clocking healthy growth

and increasing its share in the volume matrix. More than 135,000 natural gas

vehicles are now plying in the company’s markets.

GGAS still awaits authorisation from the PNGRB for its areas of operations.

However, to pursue growth it has bid for a new area within Gujarat under the third

round of bidding conducted by the PNGRB. The same is currently under

evaluation. Besides volume growth, to maintain margins, the company plans to

price its gas to its various consumers taking into consideration the pricing of the

alternative fuels. We believe that through this strategy, the company will be able to

maintain volume growth and margins going ahead. At current levels, the stock is

trading at 18.1x and 16.1x CY2011E and CY2012E earnings, respectively. We

recommend an Accumulate on the stock, with a Target Price of `418, implying an

upside of 11.6% from current levels.