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Gujarat Gas: The challenges continue - Views on News from Equitymaster
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Gujarat Gas: The challenges continue
May 6, 2013

Gujarat Gas company Ltd has announced its results for the first quarter of financial year 2013 (1QCY13). During the quarter, the company has reported a 6.8% year on year (YoY) growth in the net sales while bottomline declined by 8.7% YoY. Here is our analysis of the results.

Performance summary
  • Net sales for the quarter were up 6.8% on a year on year basis (YoY).
  • Operating profit for the quarter registered a 5.6% YoY decline with margins at 9.4% as compared to 10.6% in 1QCY12.
  • Net profits for the group declined by 8.7% YoY during the quarter, with margins at 7.7% as compared to 9.0% in 1QCY12.

Consolidated financial performance snapshot
Rs m 1QCY12 1QCY13 Change
Net Sales 7,143 7,629 6.8%
Other operating income 98 50 -48.7%
Total operating income 7,240 7,679 6.1%
Expenditure 6,476 6,956 7.4%
Operating profit (EBDITA) 765 722 -5.6%
EBDITA margin (%) 10.6% 9.4%  
Other income 294 259 -11.9%
Interest 0 0 2.4%
Depreciation 156 187 19.6%
Profit before tax 902 794 -12.0%
Profit before tax margins (%) 12.5% 10.3%  
Tax 248 199 -19.9%
Profit after tax/(loss) 654 595 -9.0%
Net profit margin (%) 9.0% 7.8%  
Minority share 5 3 -44.6%
Profit after tax for the Group 650 593 -8.7%
Group PAT margins (%) 9.0% 7.7%  
No. of shares (m)   128  
Diluted earnings per share (Rs)*   21.9  
Price to earnings ratio (x)*   11.1  
*based on trailing 12 months earnings

What has driven the performance in 1QCY13?
  • The net sales for the quarter were up by 6.8% YoY. The gas sales volumes during the quarter stood at 264 million standard cubic metres (mmscm) as compared to 304 mmscm in 1QCY12 (down 13% YoY) and 270 mmscm in the previous quarter (4QCY12) (down 2% QoQ) The average realizations on gas sales during the quarter grew by around 23% YOY and by 3% on a quarter on quarter (QOQ) basis. As per the management, the domestic gas supplies declined significantly during the quarter and the shortfall was compensated by higher share of regasified LNG (RLNG).

  • The operating profits for the quarter declined by 5.6% YoY, with operating profit margins slipping by 1.2% (YoY). This was mainly due to higher share of imported gas that led to increase in the cost of gas. As compared to around 23% YoY growth in the average realizations, the average gas costs were up by around 24.6% YoY. As a result of high cost of gas, the volumes were also adversely impacted, especially in the industrial segment.

  • The net profits for the quarter declined by 9% and the net profit margins also slipped by 1.3% (YoY).This was despite a lower effective tax rate for the quarter as compared to 1QCY12, mainly because of the higher gas costs and decline in gas volumes.
    Cost breakup
    Rs m 1QCY12 1QCY13 Change
    Raw material 5,954 6,440 8.2%
    as a % of Sales 83.4% 84.4%  
    Employee expenses 152 165 8.5%
    as a % of Sales 2.1% 2.2%  
    Other expenses 369 351 -5.0%
    as a % of Sales 5.2% 4.6%  
    Total expenses 6,476 6,956 7.4%
    as a % of Sales 90.7% 91.2%  

What we expect?

As per the management, the company has filed tariffs post authorization from the Petroleum & Natural Gas Regulatory Board (PNGRB) for its transmission pipeline. It has received authorization for its city gas distribution areas of Surat, Bharuch and Ankleshwar. The management has spent around Rs 2 bn in last one year on network expansion.

The decline in gas supplies and higher gas costs due to rising share of RLNG are likely to remain a concern for the company and will impact the profit margins adversely. We also believe any increase in gas prices by the management (to protect the margins) is likely to adversely impact the gas demand.

The stock is currently trading at a trailing twelve months price to earnings multiple (PE) of 11.1x. While the stock prices have significantly corrected since our last recommendation (down 20%), we maintain our 'Sell' view on the stock on account of lack of gas supply and pricing issues that are unlikely to be resolved in the near term.

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