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Gujarat Gas: Retail segment drives the show - Views on News from Equitymaster

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Gujarat Gas: Retail segment drives the show
Feb 22, 2008

Performance summary
  • Topline increases by 49% YoY during 4QCY07.
  • EBITDA margins expand to 18%, from 15% in 4QCY06.

  • Other income rises by 76% YoY during the quarter.

  • Bottomline registers a growth of 113% YoY owing to operating margin expansion and higher other income.

  • Topline and bottomline grow 47% YoY and 79% YoY respectively in CY07.

  • Dividend declared of Rs. 3 per share of face value of Rs. 2 each.

Standalone financial snapshot
(Rs m) 4QCY06 4QCY07 Change CY06 CY07 Change
Net sales 2,265 3,377 49.1% 7,915 11,649 47.2%
Income from services 80 68 -15.2% 345 294 -14.7%
Total operating income 2,345 3,445 46.9% 8,259 11,944 44.6%
Expenditure 1,995 2,814 41.1% 6,837 9,418 37.7%
Operating profit (EBDITA) 350 631 80.2% 1,422 2,525 77.6%
EBDITA margin (%) 14.9% 18.3%   17.2% 21.1%  
Other income 27 47 76.4% 188 203 8.0%
Interest 10 0 -97.9% 30 2 -93.9%
Depreciation 82 98 19.6% 296 371 25.2%
Profit before tax 284 579 103.8% 1,284 2,356 83.5%
Tax 102 191 87.5% 395 765 93.7%
Profit after tax/(loss) 182 388 112.9% 889 1,591 79.0%
Net profit margin (%) 7.8% 11.3%   10.8% 13.3%  
No. of shares (m)         64.1  
Diluted earnings per share (Rs)*         24.8  
Price to earnings ratio (x)*         12.9  

What has driven performance in 4QCY07?
  • Retail sales grew by 20% over 4QCY06 due to the company’s continuing focus on the segment. Retail sales were 244 millions standard cubic meters (mmscm) during 4QCY07. The company’s expertise in converting customers and the reliability of its supply has enabled it to grow sales in this area at a robust pace over the past few quarters. Its gas procurement strategy continues to be underpinned by the focus on ensuring supply security in the retail market and enabling its growth.

  • Sales to the CNG segment increased by over 30%, to reach 19 mmscm during 4QCY07. 5,791 vehicles have been converted to CNG in the markets where the company has a footprint.

  • In addition to the retail segment, short term contracts in the bulk segment at strong margins, went a long way in enhancing the company’s bottomline in 4QCY08.

  • It may be recalled that increase in gas costs had put severe pressure on margins in CY06. The total volume of gas sold during 4QCY07 was 328 mmscm against 307 mmscm in the corresponding period last year.

  • Gas flow from the Tapti expansion fields was enhanced during CY07. An average of 1.43 mmscmd of Tapti expansion gas was received during the period.

  • The exchange rate remained favourable, which enabled the company to regain some of its earlier losses on account of exchange fluctuation.

    Cost break-up
    (Rs m) 4QCY06 4QCY07 Change CY06 CY07 Change
    Raw materials 1,739 2,470 42.0% 5,969 8,296 39.0%
    % sales 74.1% 71.7%   72.3% 69.5%  
    Staff cost 78 70 -10.8% 287 310 7.9%
    % sales 3.3% 2.0%   3.5% 2.6%  
    Other expenditure 178 275 54.0% 581 812 39.8%
    % sales 7.6% 8.0%   7.0% 6.8%  
    Total cost 1,995 2,814 85.3% 6,837 9,418 86.7%
    % sales 85.1% 81.7%   82.8% 78.9%  

What to expect?
We believe that the core business of the company is poised for decent growth going forward. Gas from the Tapti field expansion project has started to flow in September and is expected to continue the recovery of volumes going forward. The growth in industrial retail sales is at a faster pace, where the margins are expected to be better than the bulk industrial sales. Also, the CNG business, another high margin segment is expected to have a larger share in the revenue mix of the company going forward. These likely developments give an indication of sustained increased margins for the company going forward.

Gujarat Gas is currently trading at Rs 319 at a price to earnings multiple of 13 times on CY07 earnings. Thus, taking into account these factors, we remain positive on the stock from a long-term perspective.

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