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Gujarat Gas: Analysis of the key factors...

Apr 4, 2007

Every company or industry has some peculiar characteristics on which growth and profitability hinge. In this write-up, we will focus on the key factors affecting the operating profitability and ultimately, the stock returns of Gujarat Gas.

About the company
Gujarat Gas Company (GGCL), a 65% subsidiary of the global gas major British Gas, is India's 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 35% of GAIL's gas pipeline network), the company caters to industrial (for their energy requirements), domestic (piped natural gas or PNG) and automobiles (compressed natural gas or CNG) in the cities of Surat, Ankleshwar and Bharuch. Currently, company is building pipeline network in Vapi. GGCL supplies approximately 3 million standard cubic meters per day (MMSCMD) to 1.7 lakh domestic, 2,200 commercial, 30,000 automobiles, and 650 industrial customers. GGCL pioneered the concept of gas distribution to industrial, commercial and domestic customers in Ankleshwar and Bharuch in 1989 and later expanded to Surat in 1991.

Analysis of operating expenditure
Being in the business of gas distribution and marketing, the most important component of a company's expenditure happens to be the purchase of gas. This is also reflected by the table below, which shows the composition of operating costs as a percentage of sales.

Components of operating cost...
(% Of sales) CY00 CY01 CY02 CY03 CY04 CY05
Gas cost 63.7% 66.0% 68.7% 72.2% 70.2% 67.0%
Rent, rates and taxes 0.6% 0.4% 0.4% 0.3% 0.4% 0.4%
Insurance 0.2% 0.2% 0.3% 0.2% 0.2% 0.2%
Power and fuel 0.4% 0.3% 0.3% 0.3% 0.5% 0.8%
Employees 3.8% 3.3% 3.5% 3.2% 3.4% 3.4%
Repairs and Maintenance 0.5% 0.5% 1.3% 1.3% 1.5% 2.2%
Stores 0.2% 0.2% 0.2% 0.2% 0.3% 0.4%
Commissions 0.2% 0.2% 0.2% 0.2% 0.3% 0.4%
Traveling 0.3% 0.2% 0.2% 0.3% 0.2% 0.5%
Hire charges 0.2% 0.2% 0.1% 0.1% 0.2% 0.3%
Misc. expenditure 0.7% 0.5% 0.5% 0.4% 0.6% 0.8%
Other expenditure 2.3% 1.3% 1.2% 1.0% 1.5% 2.1%
Total operating expenditure 73.1% 73.3% 76.9% 79.7% 79.3% 78.5%
EBDITA margins 26.9% 26.7% 23.1% 20.3% 20.7% 21.5%
Note: Based on standalone numbers.

The table below explains the business dynamics of the company; it shows the growth in volumes, average realisation per standard cubic meters (scm) and average realisation per MMBTU (million metric British thermal unit). It also shows the cost per MMBTU and ultimately, the gas spread enjoyed by the company.

Gas volumes and gas spread over the past few years...
Particulars CY02 CY03 CY04 CY05
Volumes (mmscm) 418 513 573 636
% change   22.7% 11.7% 11.0%
Average realisations( per scm) 8.9 8.8 8.7 8.9
Average realisations( per mmbtu)(in US$) 5.2 5.4 5.8 5.7
Cost of gas per mmbtu ( per mmbtu)(in US$) 3.8 4.3 4.5 4.1
Gas spread ( per mmbtu in US$) 1.4 1.1 1.3 1.6
Gas spread ( % of sales) 26.9% 20.4% 22.4% 28.1%
Note: Based on standalone numbers.

Gross gas spread has improved over the past few years on the back of improved client mix for the company. Bulk industrial, which contributed 76% to the total volumes in CY02, contributed only 26% (in CY05) to the total volumes. Thus, the share of retail industrial (units with consumption of less than 0.1 m scm) has gone up. Company has largely depended on the fuel parity (prices of gas vis--vis alternative fuels) for improved profitability. However, with the company moving into the higher margins retail business, this dependence is likely to reduce along with good scope for margin improvement. Further, use of gas in newer applications (diamonds and textiles) and for new business such as Combined heat and power (CHP), CNG and Cogen is also likely to be margin accretive.

Another driving force behind the operating performance and profitability is the growth in the gas volumes. Infact, growth in profitability could also largely be attributed to growth in the volumes. Gujarat gas has registered a CAGR of 13% in volumes (between CY00-CY05).

Thus, as we have seen, the company has not only made concerted efforts towards increasing its volumes, but with superior product placement has also ensured higher realisations. However, there is a limit to which the margins can improve and hence, the major onus of growth in profits would depend upon how fast the company is able to grow its volumes. In the next article, we will take our analysis further and analyse the margins and volumes for the company going forward.

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