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Gujarat Gas: Does the walk

Mar 14, 2002

The gas transmission & distribution company, Gujarat Gas Company Ltd. (GGCL), has declared a solid performance for the fiscal ended December '01. Topline of the company has been growing above 20% annually over the past three years. The company is primarily operational in the Southern Gujarat region of Surat, Ankleshwar and Bharuch.

(Rs m) 4QFY01 4QFY02 Change FY01 FY02 Change
Net Sales 783 952 21.6% 2,945 3,624 23.0%
Other Income 33 39 18.4% 133 156 17.2%
Expenditure 608 704 15.9% 2,150 2,650 23.2%
Operating Profit (EBDIT) 176 248 41.2% 795 975 22.6%
Operating Profit Margin (%) 22.5% 26.1%   28.6% 27.2%  
Interest 28 25 -8.4% 109 105 -3.3%
Depreciation 24 27 8.8% 111 109 -1.7%
Profit before Tax 156 235 50.3% 708 916 29.3%
Extraordinary items (24) -   (24) -  
Tax 71 89 26.4% 222 325 46.7%
Profit after Tax/(Loss) 62 146 135.0% 463 591 27.7%
Net profit margin (%) 7.9% 15.3%   18.5% 16.6%  
No. of Shares 12.8 12.8   12.8 12.8  
Diluted Earnings per share* 19.3 45.5   36.1 46.1  
P/E Ratio   10.9     10.7  

Growth in the current year could be due to, amongst others, supply to new industrial customers including Search Chem and Gujarat State Petronet Ltd. (GSPL). The company also retails compressed natural gas (CNG) to the transportation sector, primarily in Surat city. Innovative solutions like mobile gas dispensing units have been commissioned on the Surat - Ankleshwar route to cater to transit vehicles. One of the advantages of piped gas, especially to domestic users, is likely to have been highlighted in the recent riots, which disrupted work routine for more than a week.

As the company augments it's customer base across all segments, asset utilisation levels will improve. This is likely to result in better operating efficiencies leading to higher operating margins. Gas transportation companies are likely to enjoy higher operating leverage, as compared to other industries. This suggests that a higher proportion of sales is likely to be reflected in the bottomline on augmenting operating rates. We reckon, the same to have facilitated the jump in OPM for FY02. Going forward, one of the key risks faced by the company is a hike in raw material costs -- natural gas. The Government has announced its preference to link domestic gas prices to rates prevailing in international markets.

Currently, domestic natural gas prices have a floor and ceiling of Rs 2,150/ thousand standard cubic meters (tscm) and Rs 2,850/ tscm respectively. These rates are not applicable in the North East region. The petroleum ministry, on the other hand, offers market price ranging between Rs 3,900/tscm and 5,900/tscm to indegeniously produced gas from joint ventures (JVs). The twin objective of allowing market forces to drive future economic activity and reduction of subsidies, which are proving burdensome, is likely to compel the Government to align domestic and international gas markets. That said, the hike in prices is likely to be graded, as key consumers belong to the sensitive power and fertiliser sector. As per reports, the Government, in two phases, will link international and domestic prices by FY04. Although demand for gas is far in excess of supply, operating margins of GGCL are likely to hinge on the company's ability to pass on costs to the consumer.

Another concern dogging the company is gas supplies. Currently, an estimated 60% of supplies are sourced from Gujarat State Petroleum Corporation Ltd. (GSPCL) in which the company holds strategic stake. The remaining is sourced from the state-owned competitor, Gas Authority of India Ltd. (GAIL). However, as per reports, Gail is experiencing difficulty in gas production at the Gandhar gas fields. Any long-term solution is likely to be met through liquified natural gas (LNG) imports, which are scheduled to commence from FY04. Poor gas availability could be limiting better utilisation of assets. That said, the company is identifying new sources for gas supply. As per reports, GGCL has signed an agreement with Cairns Energy to buy natural gas from the CB-OS/2 block in the Cambay basin, Gujarat. The contract provides for supply of 1.3 mmscmd of gas for a five year period beginning July 1, 2002. Parent company, British Gas is involved in setting up a LNG terminal at Pipavav. GGCL has entered into a MoU for procuring 3.6 mmscmd of regassified LNG from the Gujarat Pipavav Port LNG Project. The supplies are likely to commence only in the next three to five years.

The stock has pulled down considerably in the last six months. This could be due to markets recognising the above mentioned concerns. At Rs 495 the scrip is trading on a multiple of 10.7x FY02 earnings. At the end of FY01 the scrip was valued at 18x earnings. That said, while short term hiccups could unnerve markets, long term fundamentals of the company look strong.

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