Gujarat Gas - Good performance in tough times – BUY says IIFL

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Good performance in tough times
Gujarat Gas’s (GGAS) net profit grew 27% YoY in 3QCY10, on 1) 12% volume growth; and 2) 8% YoY
increase in gross margin/scm. It is worth noting that GGAS’s spread rose in the face of two adverse
factors: 1) it purchased almost 50% of its 3.5mmscmd volumes from spot LNG markets, to offset the
disruption in gas supplies from PMT (Panna, Mukta and Tapti fields); and 2) 1.8% depreciation in INR
vs USD. This indicates GGAS’s pricing power. We expect spreads to expand further, with normalisation
of PMT gas supplies in 4QCY10, and strengthening INR vs USD. We retain BUY.
Volumes up despite supply-side disruption: GGAS’s volumes increased 12% YoY to 3.5mmscmd in 3QCY10.
During the quarter, supplies from PMT—GGAS’s major gas supplier—were disrupted for a while, and it received
<1mscmd gas (as against the 2mscmd that it is entitled to), thereby requiring it to purchase R-LNG (spot)
cargos to meet demand from industrial consumers. Despite higher prices for the R-LNG (as reflected in the 17%
YoY increase in realisations), consumers continued purchases—which reflects the underlying strength in demand.
Margins expansion expected to continue in 4QCY10: In addition to higher spot purchases, GGAS’s
input prices also increased owing to 1.8% depreciation of INR vs USD (QoQ). However, despite this, GGAS’s
gross spread/scm saw an 8% YoY increase to Rs3.7/scm, which reflects its pricing power. The spread could
have been higher, had its gas procurement from PMT not been disrupted. With normalisation of gas supplies
from PMT in 4QCY10, we believe GGAS is set to report QoQ improvement in spreads.
Play on emerging CGD business; we retain BUY: The management’s commentary indicates that GGAS is
aggressively pursuing geographical expansions, both within and outside Gujarat. Our CY09-12 earnings
CAGR estimate of 20% does not build in geographical diversification, and rests primarily on an increase in
gas availability in GGAS’s areas of operation. We reiterate that GGAS is the best play on the CGD business,
which is set for structural growth over the next few years (see our recent report High on gas).