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Gujarat gas: Conference call extracts…
Jan 17, 2007

We recently had a conference call with the management of Gujarat gas to gauge the growth prospects of the gas distribution sector in the long-term in general and Gujarat Gas in particular. Following are the key excerpts from the same.

What is the company’s business?
Gujarat Gas Company (GGC), a 65% subsidiary of the global major BG group, is India’s largest private sector gas distribution and transmission company. The company has a presence across three major industrial cities of Surat, Ankleshwar and Bharuch. With a pipeline network of over 2,100 kms (nearly 34% of GAIL’s gas pipeline network), the company caters to both bulk and retail industrial (for their energy requirements), domestic (piped natural gas or PNG) and automobile industry (compressed natural gas or CNG) requirements. GGCL supplies approximately 3 million standard cubic meters per day (MMSCMD) to 170,000 domestic (addition of 20,000 in a year), 2,200 commercial, 30,000 automobiles and 650 industrial customers.

The key takeaways…
The supply side: Up till now, Gujarat Gas had contracts to the extent of 3.5 MMSCMD (million metric standard cubic meters per day). With the recent signing up of two new contracts, the supply-side concerns have eased to an extent. Company has signed contracts for 0.7 m cubic meter of gas (immediately available, earlier it was on spot basis) and a contract of 1.7 m cubic meters of gas (available from 3QCY07), which will come from the parent BG’s increased gas availability from the PMT (Panna Mukta Tapti) fields. Given the huge demand potential in the retail as well as the bulk segment, the incremental gas supply to Gujarat Gas is likely to be absorbed easily.

Volumes mix: Gujarat Gas caters to two different markets segments viz. bulk and retail segment. While the bulk segment ensures bigger and stable offtake, the retail segment drives margins. During CY02, bulk contributed 76% of the business mix with retail contributing the remaining. The mix has changed dramatically in recent times with bulk contributing 25% of the total volumes and the retail accounting for the rest. Based on our interactions with the management, we believe that the increased gas supplies from 3QCY07 will take some time before it can be provided to the retail segment. This is due to the fact that adequate infrastructure needs to be put in place for the same. Hence, some part of the enhanced supplies will be towards bulk segment of the market, thereby improving its standing in the overall volume mix in the near term. However, the management has identified the retail segment as focus area from a long-term perspective (majorly due to higher margins).

On CNG: Gujarat Gas currently operates 20 CNG outlets (18 of it in Surat). The government of Gujarat has made CNG mandatory for auto rickshaws in Surat from 1st January 2006, which has had a positive impact on volumes (however, incremental additions from hereon is likely to be lower). To capture the required scale of operations, the company plans to add 5–7 CNG outlets per year. The management also said that its thruput per outlet is roughly in the range of 12,000 kgs to 15,000 kgs. Gujarat Gas plans to increase the revenues from the CNG business so that it becomes 10% of the total revenues from the current level of 5%. Currently, GGAS fuels 40,000 vehicles in Surat and Ankleshwar, majority of which are 3 wheelers. Surat, the core area of operation, has 1 m passenger vehicles. However, the potential market size is smaller, as only those cars that notch more than 50 kms per day are economically feasible for conversion into CNG. The sales volumes from the segment, which is 1,10,000 scmd (standard cubic meters per day) is expected to scale up as Surat Municipal Corporation is launching the city buses service, which will run on CNG.

On Cogen Business: Gujarat Gas has acquired business of cogeneration of power from BG India Energy Services Private limited. The acquisition, worth Rs 109 m, was done at net asset value (NAV). The acquired plant has a capacity of 20 MW. Company plans to scale up the capacity to 100 MW in next 4 to 5 years. Gujarat gas will built the power plant via an SPV and charge lease rentals from the customers. However the lease rentals are expected to be variable (depending on the case to case basis), the same can be arrived using an IRR of 15% to 20% for the investment. Cogen business has margins profile akin to that of retail business, thus the overall margins are expected to improve in the future.

Expansion to new geographies: GGAS has planned to expand to Vapi in August 2006; however, the project has been delayed due to partner, GIDC, not laying down its pipeline on time. However the revenues from the segment is expected to commence from the next quarter. The company expects to market 0.5 to 0.7 m cubic meters of gas to the region going forward. Company also intends to supply to Jhagadia, an industrial town near Ankleshwar.

On the capex: Company plans to spend Rs 1.2 to 1.3 bn over the next few years, inclusive of the maintenance capex of 400 m.

What to expect?
Gujarat Gas is currently trading at Rs 1,265 at a price to earnings 17 times annualised 9mCY06 earnings. Gujarat Gas has a sound business model, largely driven by the growing demand for gas from both industrial (bulk and retail) as well as retail segment. Increased revenues from the CNG segment as well as from the Cogen business is likely to further reduce the business risk. Operating margins are expected to improve on the back of increased retail volumes. However, improved economics of alternative liquid fuels (fuel oil and LDO) might prove to be a spoilsport. Further, GGAS also holds a stake in GSPC, a government of Gujarat undertaking, which is coming out with an IPO. The IPO is expected to create value for GGAS. We will very soon put a detailed analysis of our view on the stock.

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