The regional gas transmission & distribution (T&D) company, Gujarat Gas Company Ltd. (GGCL) declared results yesterday. The turnover of the company has been consistently growing by double digits and has met market expectations. Having said that, compared to the last four quarters, the growth has declined. This could be due to a higher base and the company ramping up operations.
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Turnover growth has been driven by both better volumes and higher realisations. For 1QFY03, T&D volumes increased by 7.3% YoY and realisations have improved by an estimated 6.2%. The agreement with Gujarat State Petronet Ltd. (GSPL) to transport 0.5 mmscm per day (mmscmd) of gas, along the HAPi pipeline, in the second half of FY02 has contributed to volumes. In fact, gas transportation revenues amounted to Rs 31.2 m for the quarter. The company has augmented its customer base by an estimated 16,000 in the past twelve months. Majority of the new customers are likely to be retail customers for piped gas.
As has been mentioned earlier in our reports, 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. Consequently, the company has been able to hike OPM by 100 basis points. The increas in raw material costs has largely been driven by higher gas volumes. This indicates that estimated improved realisations are reflected in operating profits resulting in better margins.
The higher cash flows in the previous fiscal is likely to have resulted in higher investment income in the quarter ended March '02. The extraordinary item in 1QFY02 & 1QFY03 refer to prior period expense and non-recurring income respectively. Adjusting for the same, profit after tax would have increased by only 9.4%, which indicates that higher tax has eaten into post tax profits. In the concerned quarter GGCL has become a full tax rate paying company.
At Rs 592 the scrip is trading on a multiple of 9x 1QFY03 annualised earnings. On adjustment of extraordinary items, the valuation increases to 11.4x. In the corresponding period of the previous year, the stock was trading on a multiple of 13.6x annualised earnings. Valuations, over the past twelve months, have been sliding as markets factor in the risk of higher gas prices with dismantling of the administered pricing mechanism (APM).
That said, the hike in prices is likely to be graded, as key gas consumers belong to the sensitive power and fertiliser sector. As per reports, the Government, in two phases, could link international and domestic prices by FY04. Another concern dogging the company has been Gujarat Government's appointment of GSPL as the sole agency for establishing a gas grid in the state. Although Gujarat Gas has been offered a stake in GSPL, the company will require a no-objection certificate (NOC) from the sole agency for developing competing pipelines. Further, as per reports, the centre is contemplating a new gas policy, which increases the uncertainty in business.
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