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Gujarat Gas: Volumes down, margins up - Views on News from Equitymaster

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Gujarat Gas: Volumes down, margins up
May 2, 2008

Performance summary
  • Topline declines by 1.3% YoY during 1QCY08, largely due to lower volume sales of gas.
  • EBITDA margins expand to 21.4% (18.2% in 1QCY08) on the back of higher income from services and lower raw material costs (as percentage of sales).

  • Other income rises by 30% YoY during the quarter.

  • Bottomline registers a growth of 21% YoY owing to operating margin expansion and higher other income.

Consolidated financial snapshot
(Rs m) 1QCY07 1QCY08 Change
Net sales 3,325 3,283 -1.3%
Income from services 62 65 5.3%
Total operating income 3,387 3,347 -1.2%
Expenditure 2,769 2,630 -5.0%
Operating profit (EBDITA) 618 717 16.1%
EBDITA margin (%) 18.2% 21.4%  
Other income 38 49 29.5%
Interest 0 0 -29.3%
Depreciation 90 103 14.3%
Profit before tax 565 663 17.3%
Tax 188 209 10.9%
Profit after tax/(loss) 376 454 20.6%
Net profit margin (%) 11.1% 13.6%  
No. of shares (m) 64.1 64.1  
Diluted earnings per share (Rs)*   25.2  
Price to earnings ratio (x)*   10.7  
*On trailing twelve months earnings

What has driven performance in 1QCY08?
  • The total volume of gas sold during the quarter was 313 million standard cubic meters (mmscm) compared to 341 mmscm in 1QFY07, due to a lower availability of gas from the Panna Mukta Tapti (PMT) fields. Although overall volumes were lower than 1QFY07, sales to the retail segment continued to grow during 1QFY08. Retail sales were 247 mmscm during 1QFY08. Higher sales in the retail market have contributed towards increase in profits, as the margins are better in the same as compared to bulk sales.

  • Sales to the CNG segment increased by over 30% YoY during 1QFY08, to reach 21 mmscm. More than 4,800 vehicles were converted to CNG during the quarter in the company’s markets (Surat, Bharuch and Ankleshwar – all in Gujarat), taking the total number of converted vehicles to over 67,000.

    Cost break-up
    (Rs m) 1QCY07 1QCY08 Change
    Raw materials 2,550 2,383 -6.5%
    % sales 75.3% 71.2%  
    Staff cost 77 93 21.9%
    % sales 2.3% 2.8%  
    Other expenditure 143 154 7.9%
    % sales 4.2% 4.6%  
    Total cost 2,769 2,630 23.3%
    % sales 81.8% 78.6%  

  • GAIL was appointed the sole nominee by the central government to market the entire gas from the PMT fields. Gujarat Gas, which was receiving about 2.9 mmscmd of gas from the PMT fields in 1QFY08, has executed a deal with GAIL, to purchase 2.13 mmscmd of gas from April 2008 onwards on a long term basis. Supplies from other sources continue in accordance with their respective contracts.

  • The Petroleum & Natural Gas Regulatory Board notified the city gas distribution regulations effective March 19, 2008. Gujarat Gas is seeking confirmation on authorisation and exclusivity in its areas of operations and has filed the relevant information for determination of distribution network tariff.

What to expect?
The decline in gas availability from the PMT fields and the new city gas regulations are a cause for concern. However, the company is performing well in the industrial retail, where the margins are 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. The stock is currently trading at Rs 269, implying a multiple of 10.7 times its trailing 12 months earnings. While the stock appears fairly valued at the current juncture, supply related concerns shall continue to weight heavy on the company’s performance in the short to medium term.

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