Gujarat Gas Company - high LNG prices to impact growth volumes; visit note; Edelweiss

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Gujarat Gas Company (GGAS IN, INR 377, Not Rated)

We recently attended the analyst meet of Gujarat Gas Company (GGas), and present below key takeaways from the meet:

n  CY11 volumes to grow at 8-10%; gas usage unattractive for DF segment

Of GGas’ CY10 sales volume of 3.3 mmscmd (+17% Y-o-Y), ~83% (81% in CY09) is to industrial customers, of which, ~65% (of 83%) is to SMEs. The company has guided to 8-10% growth in volumes for CY11. However, it runs the risk of de-growth in its direct firing (DF) segment (that uses coal/lignite as alternatives), if gas prices  remain higher or inch up further. The DF segment currently constitutes 21% of GGas’ sales volumes. Going forward, the company is likely to primarily focus on  increasing volumes in the high-value customer segment of DF (with customers willing to pay higher prices).

The company is currently focused on continuing penetration into untapped markets in Gujarat. Accordingly, it has bid to operate in the Bhavnagar district. Moreover, authorisation of its existing network of Surat and Bharuch is expected to come on May 5, 2011, following the Supreme Court hearing on its legal battle with PNGRB, the regulator. Also, decision on the bid for Bhavnagar is expected to be announced by end May.

n  Incremental gas supplies to come from LNG imports

LNG currently constitutes 26% of GGas’ gas supplies against 13% last year; the remaining gas is sourced domestically from various players. The company expects gas sourcing to be a key issue for the industry, going forward. LNG costs are currently high at USD ~16/mmbtu, which has led to high blended price of gas for GGas that it has been passing on to customers. Going forward, the company plans to revise prices more frequently against quarterly at the moment. CY10 EBITDA margins stood at 22.4%. Management expects sustainable margins of 18-20%, going forward.  

n  Our view: Stock appears fairly valued, though IGL a better play

While GGas is focused on the fast growing state of Gujarat (10-year GDP grew at 10.6%), high LNG prices could lower its volume growth. The company's guidance of 8-10% volume growth, however, seems realistic as gas usage for the DF segment has become unviable and may decline in the near future. We expect the company’s PAT to grow at 10-11% for the next 2-3 years. At INR 377/share, the stock looks fairly valued. We, however, suggest investors to switch to Indraprastha Gas (IGL) since it has superior valuations and volume growth.