Gujarat Gas is likely to witness a strong growth in the coming quarters, thanks to additional supplies of natural gas. Consider investing in the scrip with a 12-month horizon
GUJARAT GAS — an Indian subsidiary of British Gas and the largest city gas distribution company in India — is likely to witness a strong growth in topline and bottomline in the coming quarters, thanks to additional supplies of natural gas.
The company’s supply contract with Panna-Mukta-Tapti (PMT) consortium became operational in September ’07. This will add nearly 50% to GGCL’s volumes once it becomes fully operational. In view of this, investors can consider investing in this company with a 12-month perspective
GUJARAT GAS — an Indian subsidiary of British Gas and the largest city gas distribution company in India — is likely to witness a strong growth in topline and bottomline in the coming quarters, thanks to additional supplies of natural gas.
The company’s supply contract with Panna-Mukta-Tapti (PMT) consortium became operational in September ’07. This will add nearly 50% to GGCL’s volumes once it becomes fully operational. In view of this, investors can consider investing in this company with a 12-month perspective
BUSINESS: Gujarat Gas was setup in 1988 and is majority-owned by British Gas. The company has pipelines in excess of 2,100 km and sells around 3.5 million metric standard cubic meters per day (mmscmd) of natural gas.
It has a dominant position in southern Gujarat, which is India’s largest producing and consuming state of natural gas. The company buys natural gas from a number of sources including British Gas, PMT consortium, Gujarat State Petroleum, Niko Resources and GAIL.
Over 95% of the natural gas sold by the company is procured at market-determined rates, while the remaining comes from subsidised gas under the administered pricing mechanism (APM). This means that Gujarat Gas is not exposed to any revision in APM rates as determined by the government. Though the company focuses mainly on the retail segment, it also has a few bulk customers on short-term contracts. It has set up 20 CNG stations in Surat, Bharuch and Ankleshwar in Gujarat and plans to add around 10 more over the next 12 months.
GROWTH DRIVERS: The company has contracted additional 1.65 mmscmd of natural gas from the PMT consortium from September ’07. The initial supplies under this contract have just started flowing and they will reach full capacity towards the end of December ’07.
Once fully utilised, this additional supply will add over 50% to the volumes sold by the company. Gujarat Gas has launched projects to extend its pipelines to industrial areas such as Vapi and Jhagadia. It plans to spend over Rs 300 crore over the next three years on network expansion.
The company has dollardenominated contracts for purchasing natural gas while it bills its retail customers in rupees. This has enabled it to gain from the rupee’s appreciation against the dollar over the past 12 months.
FINANCIALS: During the quarter ended September ’07, the company reported a 60% YoY growth in net profit to Rs 34.1 crore. Revenues during the period were higher by 18% to Rs 276.6 crore. Operating margins during the period expanded by 640 basis points to 20.7% of net sales. Higher margins were the result of a higher rupee along with an around 14% price increase affected by the company at the beginning of ’07. Going forward, margins are expected to decline to more sustainable levels of around 17-18%.
The volumes of gas sold during the quarter declined marginally to 259 mmscm against 264 mmscm in the corresponding period last year. This was mainly on account of expiry of a gas supply contract with one supplier and technical problems with another supplier, restricting a little over 0.5 mmscmd of supplies for the company.
During the nine-month period ended September ’07, the company’s net profit grew 63% to Rs 113.7 while net sales were up 29% to Rs 898.8 crore.
VALUATIONS: At its current market price of Rs 305, the stock is valued at 12.7 times its ’07 estimated earnings per share of Rs 24.1. Considering the company’s assured volume-led growth, in the near term the scrip appears attractive. Considering the additional revenues from new gas inflows, we estimate a forward EPS of Rs 31 for ’08. The current market price is just 9.8 times the forward EPS. RISKS: However, investors have to be wary of a few risks. The government recently set up a Petroleum and Natural Gas Regulatory Board to regulate the downstream companies in the petroleum and natural gas sector. In future, this regulatory authority can, in some way, put a ceiling on margins for city gas distribution companies, which will be detrimental to Gujarat Gas’ prospects. Also, any depreciation of the rupee against the dollar will have a negative impact on the company’s operating margins.
Over 95% of the natural gas sold by the company is procured at market-determined rates, while the remaining comes from subsidised gas under the administered pricing mechanism (APM). This means that Gujarat Gas is not exposed to any revision in APM rates as determined by the government. Though the company focuses mainly on the retail segment, it also has a few bulk customers on short-term contracts. It has set up 20 CNG stations in Surat, Bharuch and Ankleshwar in Gujarat and plans to add around 10 more over the next 12 months.
GROWTH DRIVERS: The company has contracted additional 1.65 mmscmd of natural gas from the PMT consortium from September ’07. The initial supplies under this contract have just started flowing and they will reach full capacity towards the end of December ’07.
Once fully utilised, this additional supply will add over 50% to the volumes sold by the company. Gujarat Gas has launched projects to extend its pipelines to industrial areas such as Vapi and Jhagadia. It plans to spend over Rs 300 crore over the next three years on network expansion.
The company has dollardenominated contracts for purchasing natural gas while it bills its retail customers in rupees. This has enabled it to gain from the rupee’s appreciation against the dollar over the past 12 months.
FINANCIALS: During the quarter ended September ’07, the company reported a 60% YoY growth in net profit to Rs 34.1 crore. Revenues during the period were higher by 18% to Rs 276.6 crore. Operating margins during the period expanded by 640 basis points to 20.7% of net sales. Higher margins were the result of a higher rupee along with an around 14% price increase affected by the company at the beginning of ’07. Going forward, margins are expected to decline to more sustainable levels of around 17-18%.
The volumes of gas sold during the quarter declined marginally to 259 mmscm against 264 mmscm in the corresponding period last year. This was mainly on account of expiry of a gas supply contract with one supplier and technical problems with another supplier, restricting a little over 0.5 mmscmd of supplies for the company.
During the nine-month period ended September ’07, the company’s net profit grew 63% to Rs 113.7 while net sales were up 29% to Rs 898.8 crore.
VALUATIONS: At its current market price of Rs 305, the stock is valued at 12.7 times its ’07 estimated earnings per share of Rs 24.1. Considering the company’s assured volume-led growth, in the near term the scrip appears attractive. Considering the additional revenues from new gas inflows, we estimate a forward EPS of Rs 31 for ’08. The current market price is just 9.8 times the forward EPS. RISKS: However, investors have to be wary of a few risks. The government recently set up a Petroleum and Natural Gas Regulatory Board to regulate the downstream companies in the petroleum and natural gas sector. In future, this regulatory authority can, in some way, put a ceiling on margins for city gas distribution companies, which will be detrimental to Gujarat Gas’ prospects. Also, any depreciation of the rupee against the dollar will have a negative impact on the company’s operating margins.
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