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Gujarat Gas: Facing multiple headwinds - Views on News from Equitymaster
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Gujarat Gas: Facing multiple headwinds
May 2, 2012

Gujarat Gas has announced its 1QCY12 results. The company has reported a 37% YoY growth in the topline and 10% YoY decline in net profits. Here is our analysis of the results.

Performance Summary
  • Net sales for the quarter were up 37.3% on a year on year basis (YoY).The sales were up 11% on a quarter on quarter basis (QoQ)
  • Operating profit for the quarter registered a 29.7% YoY decline with margins at 10.6% versus 20.6% in 1QCY11.
  • Net profits for the group were down 9.9% YoY with margins at 9.0% versus 13.6% in 1QCY11.

Consolidated financial snapshot
Rs m 1QCY11 1QCY12 Change
Net Sales 5,203 7,143 37.3%
Other operating income 88 98 10.5%
Total operating income 5,292 7,240 36.8%
Expenditure 4,204 6,476 54.0%
Operating profit (EBDITA) 1,000 667 -33.3%
EBDITA margin (%) 19.2% 9.3%  
Other income 101 294 190.5%
Interest 0.35 0.41 17.1%
Depreciation 145 156 7.7%
Profit before tax 1,044 902 -13.5%
Profit before tax margins (%) 19.7% 12.5%  
Tax 321 248 -22.5%
Profit after tax/(loss) 723 654 -9.6%
Net profit margin (%) 13.7% 9.0%  
Minority share 2 5 111.6%
Profit after tax for the Group 721 650 -9.9%
Group PAT margins (%) 13.6% 9.0%  
No. of shares (m)   128  
Diluted earnings per share (Rs)*   20.8  
Price to earnings ratio (x)*   15.6  
* On the basis of trailing 12 months earnings

What has driven performance in 1QCY12?
  • The annual growth of 37% was on account of higher realizations by the company. On a per day basis, the company sold 3.3 mscmd (million standard cubic metre per day). Overall, the gas sales volumes for the quarter stood at 304 mscm (million standard cubic metres) versus 303 mscm in 1QCY11. CNG segment registered a 13% YoY increase in volumes. The average realizations for the quarter stood at Rs 23.5 per scm from Rs 17.5 per scm in 1QCY11.

  • Despite a hike in average realizations, the operating profits declined by 29.7% YoY on account of increase in gas sourcing costs (due to higher share of regasified liquid natural gas/RLNG). The average cost of sourcing gas increased to Rs 19.6 per scm versus Rs 12.5 per scm in 1QCY11, up 56.8% YoY). The employee expenses during the quarter stood at 2.4% as a percentage of sales (versus 3.4% in 1QCY11) and 'Other expenses' stood at 5.7% of sales (6.3% in 1QCY11). As a result of all these factors, the operating margins for the quarter declined to 10.6% versus 20.6% in 1QCY11. Operating profits per unit sales of gas (EBITDA per scm) for the quarter declined to Rs 2.2 per scm versus Rs 3.3 per scm during 1QCY11 (down 33% YoY)

    Cost breakup
    Rs m 1QCY11 1QCY12 Change
    Raw material 3,799 5,954 56.7%
    as a % of Sales 90.4% 91.9%  
    Employee expenses 141 152 8.2%
    as a % of Sales 3.4% 2.4%  
    Other expenses 264 369 39.9%
    as a % of Sales 6.3% 5.7%  
    Total expenses 4,204 6,476 54.0%

  • The bottomline declined by 9.6% YoY during the quarter mainly on account of increase in raw material costs. However, the decline was moderate relative to operating profit level as 'Other income' increased 2.9 times (YoY) due to lower effective tax rate. The net profit margins for the quarter stood at 9.0% versus 13.6% in 1QCY11.

What to expect?
Going forward, we expect the high gas cost pressures to continue and believe it will be difficult for the company to pass on the price hikes since most of the customer base happens to be industrial group where the resistance to price hikes is high. Too much of price hikes can have an adverse impact on the volumes offtake as well. Already, the volume visibility is low as far as Gujarat Gas is concerned. Besides, the regulatory concern (regulation of tariffs) by Petroleum and Natural Gas Regulatory Board (PNGRB) remain an overhang.

At current prices, the stock is trading at a PE( Price to earnings multiple on a trailing twelve months earnings basis) of 15.6x which we believe is high given the circumstances. Hence, we maintain a cautious outlook on the stock. Regarding valuations, we will incorporate the results in our annual estimates and update our subscribers very soon.

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