Details on merged entity few quarters away • Gujarat Gas :: ICICI Securities, link

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Details on merged entity few quarters away
• Gujarat Gas reported its Q2FY15 results with revenues declining 1%
QoQ at | 681 crore and PAT down 25.4% QoQ to | 77.3 crore.
Revenues were marginally below our estimates (| 684.9 crore) on
account of marginally lower volumes of 2.2 mmscmd (our estimate
2.3 mmscmd)
• The gross margin came in at | 7.9/scm lower than our expectation of
| 8.7/scm as the company was unable to fully pass on high LNG
costs to customers. Subsequently, PAT came in at | 77.3 crore
against our expectation of | 91.6 crore
Volumes continue to remain subdued
The volumes of Gujarat Gas have shown a declining trend down from 2.7
mmscmd in Q3FY14 to 2.2 mmscmd in Q1FY15. The volumes in the
current quarter continue to remain subdued as well at 2.2 mmscmd. The
flattish volume is attributable to a conversion from gas to coal, higher
dependence on R-LNG and a slowdown in industrial activity. With spot
LNG prices above $15/bbl for most of last year, it became an unfeasible
option for many consumers. The volumes were affected due to the shift
witnessed in captive power plant companies to grid power & lower
consumption by the industrial sector. With a recovery in industrial
volumes likely to be slower, we expect volumes to be range-bound.
However, lower LNG prices currently would help in a recovery of volumes
from FY16E. We have lowered out estimates for volumes to 2.2 mmscmd
(804.8 mmscm) and 2.4 mmscmd (875.8 mmscm) for FY15E and FY16E,
respectively.
Margins down QoQ
Gross margins declined 8.6% QoQ from | 8.6/scm to | 7.9/scm as the
company was unable to fully pass on high LNG costs to the customers.
This is a negative sign for the company as margins had improved
significantly in Q1FY15 on account of a sharp decline in LNG as a
proportion of raw material, that had lead to a decline in average cost of
gas. Going ahead, we expect the GSPC group to strike a balance between
right volumes and margins. We estimate the gross spreads of Gujarat Gas
at | 8.3/scm and | 8.7/scm for FY15E and FY16E, respectively.
GDNL merger
On April 21, 2014, Gujarat Gas announced its merger with holding
company Gujarat Distribution Network (GDNL). GSPC Gas, another CGD
company of GSPC Group will merge with GDNL. The other two
companies that will merge with GDNL are GFSL & GTCL. Although the
company has divulged the swap ratios, in the absence of financials of the
unlisted companies’ clear modalities of the scheme of arrangement, we
have not taken it in our assumption. However, once the merger is
completed, the company will become the largest CGD player with its
volume in the range of 7-8 mmscmd. However, on the flip side, post
merger the company will not remain a debt free company. The stock is
currently fairly valued at 15.2x FY16E EPS. Although the long term story
of the company looks good, as it will become the largest CGD player, the
near term concerns over volume growth remain. We have kept the stock
under review and will revisit the ratings after the merger process is
completed and consolidated financials are published.

LINK
http://content.icicidirect.com/mailimages/IDirect_GujaratGas_Q2FY15.pdf