Higher sourcing cost leads to muted performance- GujGas:: Centrum

Higher sourcing cost leads to muted performance
High LNG prices coupled with lower domestic gas supplies led to GujGas’ muted Q1 performance with operating margin at 9.4% and operating profit at Rs722mn against our expectations of 13.2% and Rs1,022mn respectively. The company hiked its industrial retail prices from April 1, 2013 which, along with softening LNG prices, is expected to benefit performance going ahead. Reorganisation with GSPC as parent is expected to take some time and its benefits will be felt subsequently. GujGas enjoyed higher valuations due to its MNC parentage and high dividend payout which we believe may not sustain going ahead. Volume growth too remains a near term concern. Hence, we have lowered our P/E multiple for the stock from 14x earlier to 12x and maintain ‘Buy’ with a reduced target price of Rs283 (earlier Rs341).
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Price hike in February benefits realisations: GujGas’s average distribution realisations jumped by 3.1% QoQ at Rs28.9/scm on account of price hikes effected on February 1, 2013 in industrial retail segment. Distribution volumes though remained flattish sequentially at 2.9mmscmd impacted by lower domestic gas availability and higher LNG prices.
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Higher LNG prices and lower domestic gas availability impact EBITDA/scm: Lower domestic gas availability (from PMT) and higher LNG prices led to 9.1% QoQ and 24.6% YoY increase in blended gas cost which stood at Rs24.4/scm thus lowering EBITDA/ scm to Rs2.5/scm from Rs3.9/scm in Q4.

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Profitability under pressure: Depreciation went up 19.6% YoY at Rs187m due to the capex incurred for pipeline network expansion and for putting up new CNG stations. Other income was higher at Rs259mn due to income from some investments which matured during Q1. Although operating performance was muted with EBITDA lower by 34.5% QoQ, higher other income supported profitability with only 15.5% QoQ decline in PAT at Rs593mn.
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Lowering valuation multiple due to change in parentage: Although GujGas’s Q1 performance remained muted, Q2 is expected to be better with lower spot LNG prices coupled with benefit from price hikes in the industrial retail segment (benefit from February and April price hikes). Although the open offer by GSPC Distribution Networks Ltd. (GDNL) is over, the transfer of stake by BG Asia Pacific Holdings Pte. Ltd. (BGAPH) has not yet taken place. We need to wait till the new management settles in and outlines the strategy for the company. Earlier, GujGas enjoyed higher valuations due to its MNC parentage and higher dividend payout which we believe will get lowered under the new management. We have thus lowered our P/E multiple for the stock from 14x earlier to 12x. We maintain ‘Buy’ on the stock with a lowered price target of Rs283 (earlier Rs341). Upside in GujGas may emanate from continued higher dividend payout and assurance of natural gas supplies from parent, GSPC.