More headwinds ahead for co; Stock likely to take further hit in short term
The announcement that British Gas has started the process of divesting its stake in Gujarat Gas triggered a 10% correction in the gas distributor’s shares in two trading sessions.
The latest development only adds to the list of uncertainties that the company faces and is likely that the stock could be under pressure in the near term.
Gujarat Gas has had a healthy balance sheet, a record of steady growth and clocks returns in excess of 35% on its invested capital. Its performance during the last two years has been stellar with its profits for 2010 rising 48% and by a further 41.5% in the first nine months of 2011.
Still, there are strong headwinds which could have a bearing on the company’s future growth. These risks stem mainly from the fact that the company is increasingly depending on imported LNG for its needs. Apart from being costlier, the fluctuating prices of imported LNG make it an option that a city gas company cannot rely on.
In India, availability of natural gas is limited compared to demand and its allocation is based on government policies. Gujarat Gas sells over 83% of its natural gas to small industrial customers — something that does not rank high in the government’s priority list. As a result, only about 5% of the company’s natural gas comes from government allocations while the rest has to be sourced at market rates.
In the last quarter of 2010, close to 37% of its 3.58 million metric standard cubic meters per day (MMSCMD) gas sales came from regassified LNG, leaving the company with little option but to raise prices regularly. As costs started rising, the company preferred supplying to customers who could replace costlier liquid fuels. Liquid fuel replacement demand grew to 40% of total volumes in 2010 from 29% a year ago. However, its customer profile is making it more difficult to pass on price increases.
The company’s superior results in the last couple of quarters were a result of the price increases starting April in anticipation of higher LNG prices. However, the stress is already visible. After shooting up in the June 2011 quarter, the company’s operating margins in the September 2011 quarter fell to the lowest level in the last four quarters. There is a risk that customer resistance or government intervention could make it difficult to further raise prices, thus putting pressure on margins.
With the latest correction, the scrip is now trading at close to 15 times its profits for the last 12 months. A weak sentiment could push prices lower in the short run.
The latest development only adds to the list of uncertainties that the company faces and is likely that the stock could be under pressure in the near term.
Gujarat Gas has had a healthy balance sheet, a record of steady growth and clocks returns in excess of 35% on its invested capital. Its performance during the last two years has been stellar with its profits for 2010 rising 48% and by a further 41.5% in the first nine months of 2011.
Still, there are strong headwinds which could have a bearing on the company’s future growth. These risks stem mainly from the fact that the company is increasingly depending on imported LNG for its needs. Apart from being costlier, the fluctuating prices of imported LNG make it an option that a city gas company cannot rely on.
In India, availability of natural gas is limited compared to demand and its allocation is based on government policies. Gujarat Gas sells over 83% of its natural gas to small industrial customers — something that does not rank high in the government’s priority list. As a result, only about 5% of the company’s natural gas comes from government allocations while the rest has to be sourced at market rates.
In the last quarter of 2010, close to 37% of its 3.58 million metric standard cubic meters per day (MMSCMD) gas sales came from regassified LNG, leaving the company with little option but to raise prices regularly. As costs started rising, the company preferred supplying to customers who could replace costlier liquid fuels. Liquid fuel replacement demand grew to 40% of total volumes in 2010 from 29% a year ago. However, its customer profile is making it more difficult to pass on price increases.
The company’s superior results in the last couple of quarters were a result of the price increases starting April in anticipation of higher LNG prices. However, the stress is already visible. After shooting up in the June 2011 quarter, the company’s operating margins in the September 2011 quarter fell to the lowest level in the last four quarters. There is a risk that customer resistance or government intervention could make it difficult to further raise prices, thus putting pressure on margins.
With the latest correction, the scrip is now trading at close to 15 times its profits for the last 12 months. A weak sentiment could push prices lower in the short run.
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