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Gujarat Gas: Hit by one-time effects - Views on News from Equitymaster
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Gujarat Gas: Hit by one-time effects
Mar 2, 2006

Performance Summary
Gujarat Gas announced its full year results yesterday. While the company's topline growth at 14% YoY was impressive, it would have been higher but for the decline in transmission revenues. The loss in transmission revenues has also had a negative impact on operating margins. This apart, one-time expenses in 4QCY06 also had a significant impact on margins and consequently, the company's topline and bottomline performance in CY06 was below our estimates.

(Rs m) 4QCY04 4QCY05 Change CY04 CY05 Change
Net sales 1,616 2,002 23.9% 6,531 7,468 14.4%
Expenditure 1,204 1,730 43.6% 5,196 5,994 15.4%
Operating profit (EBDITA) 411 272 -33.8% 1,335 1,475 10.5%
EBDITA margin (%) 25.5% 13.6%   20.4% 19.7%  
Other income 24 50 110.4% 115 156 36.4%
Interest 0 28 - 1 29 -
Depreciation 69 98 42.2% 214 274 27.7%
Profit before tax 366 196 -46.4% 1,234 1,328 7.6%
Extraordinary items - - - - 127 -
Tax 140 60 -57.2% 463 467 1.0%
Profit after tax 226 136 -39.7% 771 988 28.1%
Minority interest (2) 4 - 7 (2) -
Net income 228 132 -42.0% 765 990 29.4%
Net profit margin (%) 14.0% 6.8%   11.8% 13.2%  
No. of shares (m) 12.8 12.8   12.8 12.8  
Diluted earnings per share (Rs)*       59.6 77.2  
Price to earnings ratio (x)         18.0  
(* annualised)            

What is the company's business?
Gujarat Gas Company, a 65% subsidiary of the global gas major British Gas, is Indiaís largest private sector gas distribution and transmission company and has a regional presence across three of the largest industrial cities in the state of Gujarat. With a pipeline network of over 2,000 kms (nearly 34% of GAILís gas pipeline network), the company caters to industrial (for their energy requirements), domestic (piped natural gas or PNG) and automobile industry (compressed natural gas or CNG) requirements in the cities of Surat, Ankleshwar and Bharuch. The company has witnessed a steady growth in natural gas sales of 18.6% CAGR since FY98 while the bottomline has grown at a compounded rate of 30.2% during this period. Apart from gas distribution, the company also transmits gas for other players through its additional pipeline capacity and has transmitted 2.5 MMSCMD (million metric standard cubic meters per day) of gas in FY06 (9.4% of gross revenues).

What has driven performance in CY06?
Robust volume growth: The volume of gas sold during the calendar year increased by approximately 17% from 695 mmscm to 813 mmscm. The volume growth is higher than our estimates and could be attributed to the expansion on the CNG (compressed natural gas) front. The growth in revenues would have been higher but for the fall in transmission revenues during the year. As we had mentioned in our earlier analysis, following the commencement of GSPCL's transmission pipeline (earlier it was routed through Gujarat Gas's pipeline network for which the company received a fee), the company's sales have been affected. To put things in perspective, in the fourth quarter alone, transmission income was lower by Rs 40 m (2% of sales). Considering the fact that transmission income contributed to almost 9% of sales last year, there has been a negative impact. In our view, we expect volume sales to grow at a healthy rate in excess of 14% per annum and considering the fact that the company has tied-up natural gas with private players, we do not see availability of gas as a major concern going forward. Overall, in CY06, the company's topline was 12% higher than our estimates.

EBDITA falls: The company has attributed the decline in margins in 4QCY06 to the loss in transmission income, one-time non-recurring expenses to the extent of Rs 56 m and adverse gas purchase mix of Rs 52 m. Even though 4QCY06 margins fell significantly, for CY06, operating margin at 22% is 70 basis points lower than our estimates. Excluding this one-time expenses, the company's operating level performance was in line with our projections. Going forward, we have factored in an increase in natural gas cost for the company. While this is a negative, one has also got to factor in higher contribution from the sale of CNG, which is highly profitable as compared to the current sales mix of the company. Assuming no major shocks as far as gas cost is concerned in the next three years, we expect operating margins to improve.

In an expansion phase: Net profits grew by 30% YoY in CY06 led by higher other income as well as one-time pre-tax income of Rs 127 m on account of settlement of dispute with one of the gas suppliers. Excluding this one-time income, the growth in net profit in the calendar year was modest at 13% YoY. Considering the fact that the company is expanding CNG outlets aggressively, the rise in depreciation charges was on expected lines. We expect the company to incur capital expenditure to the tune of Rs 600 m each year in the next two years.

What to expect?
The stock currently trades at Rs 1,389 at a price to earnings multiple of 12.5 times our estimated FY07 consolidated earnings estimates. While we may have to upgrade our volume estimate in the next two years, margins continue to remain an area of concern. While the stock is fully valued based on current businesses, investors have to remember that the company is looking at expanding into the power sector through the SPV route, which has not been factored in our assumptions and to that extent, upside exists.

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