GUJARAT GAS: Long-term gas tie-ups crucial for higher profits

A GRADUAL increase in retail prices of natural gas has helped Gujarat Gas post a healthy 42% jump in profits for the quarter ended December 2009. It logged 17% higher net sales at Rs 386 crore, while margins improved by 570 basis points to 19.9%.
Gujarat Gas, which operates city gas distribution networks, has been suffering from a reduced availability of natural gas for past two years. The company, which grew its profits at a cumulative annualised growth rate of 22.7% between 2002 and 2007, could grow only at a CAGR of 6.7% in the subsequent two years. The company sold 2.88 million standard cubic meters of gas every day (MMSCMD) in 2009, 13.4% lower than 2007.
In 2009, the company invested Rs 155.3 crore in expanding its distribution network, significantly higher than Rs 100 crore in 2008. However, the investments have been in Surat, Bharuch and Ankleshwar where it has been operating for the past several years. But it is yet to get the approval from the Petroleum and Natural Gas Regulatory Board to operate in the adjoining areas. The investment has predominantly been incurred in compressed natural gas and PNG distribution, which get priority treatment in gas allocation from the government. After the expansion, the company managed to increase the sales in these two categories up to 19% in 2009 from 15% in 2008.
In 2009, it managed to increase its gas sales to 3.1 MMSCMD from 2.58 MMSCMD in the beginning of the year. Unable to secure longterm supply contracts domestically, the company had to increasingly rely on the LNG imported on spot basis, which does not bode well for the long-term prospects of the company. However, it was able to improve its realisations by raising retail prices by nearly 13.5% in 2009 to Rs 13.36 per standard cubic meter. As a result, the net profit earned on sale of every unit of gas moved up 14% to Rs 1.69 per cubic meter. The scrip, which is trading nearly 18.2 times its consolidated profits for the trailing 12 months, appears to be fairly valued. The company has declared a dividend of Rs 8 per share, which translates in a yield of 3.1%. The company badly needs to tie up for long-term gas supply, which can sustain its growth momentum, going forward.