GUJARAT GAS: A Good Bet for the Long Term

City gas distribution company Gujarat Gas is showing great resilience while going through a challenging phase. Its profits have jumped 47% in the last 12 months despite dwindling volumes. Its cash-rich balance sheet and healthy dividend yield supported by slow but steady growth and attractive valuations augur well for long-term investors. Just like other natural gas utilities in the country, Gujarat Gas too faced pressure due to low availability of natural gas, with its volumes going down 7%, from 1,246 mmscmd in 2011 to 1,157 mmscmd in 2012. In the first half of 2013, volumes dipped further by 15% against a year ago. The company’s dependence on imported liquefied gas, or LNG, too has gone up steadily as domestic production dipped. In 2011, only 37% of the total gas it sold was imported, which rose to 50% in the first six months of 2013. By its very nature, the cost of LNG keeps fluctuating posing another challenge for maintaining profitability. Yet, the company has been successful in passing on its cost increases to final consumers. Its operating profit margin, which was on a downward trend from its high of 24% in year 2010 to 15.5% in 2012, improved to 17.5% for the 12-month period ended June ’13. The company has focused on gaining more customers who would replace liquid fuels — fuel oil, naphtha and the like — with natural gas and thus find even imported natural gas cheaper. Such customers represented only 40% in 2010, which rose to 58% in 2012. The company’s CNG and PNG businesses, which represented 17% of total volumes in 2010, have grown to 25% now thanks to steady conversion of more and more customers. CNG still remains 40% cheaper to petrol, while PNG is around 7-8% cheaper to LPG. The company recently signed an MoU with its parent for long-term supply of 0.85 mmscmd natural gas starting 2014. This will provide visibility to the company’s volume growth in the future. Gujarat Gas will always remain cash rich, as cash generation outstrips its capital expenditure requirements. The company is currently carrying over .560 crore of cash and has over .300 crore of operating cash flows, while its capital expenditure is close to .150-180 crore annually. The natural gas utility is valued at 8.3 times its past 12-month earnings and 2.5 times its net worth, besides offering 3.3% dividend yield, which is attractive for a long-term investor.