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Gujarat Gas: Muted volumes drag topline - Views on News from Equitymaster
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Gujarat Gas: Muted volumes drag topline
May 7, 2015

Gujarat Gas has announced its results for the quarter ended March 2015. During the quarter, the company has reported 29.2% year on year (YoY) decline in the net sales while net profits for the quarter grew by 27.2% YoY.

Performance summary
  • Net sales for the quarter declined by 29.2% on a year on year basis (YoY).
  • Operating profit for the quarter grew by 16.4% YoY with margins at 16.0%, higher than 9.7% in 4QFY14.
  • Net profits for the group grew by 27.2% YoY during the quarter, with margins at 11.5%,up from 6.4% in 4QFY14. For FY15, the net profit declined by 25% YoY, with net profit margin at 12.6% , as compared to 10.8% in FY14.

Standalone financial snapshot
(Rs m) 4QFY14 4QFY15 Change 15 months ended
March 2014
FY15 (12 months
ended March 2015)
Change
Net Sales 7,664 5,430 -29.2% 38,793 24,962 na
Other operating income 57 26 -54.7% 240.5 167 na
Total operating income 7,721 5,456 -29.3% 39,034 25,129 na
Expenditure 6,976 4,589 -34.2% 32,815 20,803 na
Operating profit (EBDITA) 744 867 16.4% 6,219 4,326 na
EBDITA margin (%) 9.7% 16.0%   16.0% 17.3%  
Other income 219 188 -14.0% 896.8 798.9 na
Interest 3 1 -81.3% 5.2 2.2 na
Depreciation 204 142 -30.4% 968.4 602.8 na
Profit before tax 756 913 20.6% 6,142 4,520 na
Profit before tax margins (%) 9.9% 16.8%   15.8% 18.1%  
Tax 260 285 9.3% 1940.7 1380.2 na
Profit after tax/(loss) 496 627.8 26.6% 4,201 3,140.0 na
Net profit margin (%) 6.5% 11.6%   10.8% 12.6%  
Minority share 3 1 -64.7% 15 2.2 na
Profit after tax for the Group 493 627 27.2% 4,186 3,138 na
Group PAT margins (%) 6.4% 11.5%   10.8% 12.6%  
No. of shares (m)         128  
Diluted earnings per share (Rs)*         24.5  
Price to earnings ratio (x)*         30.4  
* On a trailing 12-months basis

What has driven performance in 4QFY15?
  • Sales for the quarter declined due to muted volumes on account of low demand from industrial segment and cheaper alternative fuels. The realizations were also down on a YoY basis.

    Cost breakup
    (Rs m) 4QFY14 4QFY15 Change FY14 FY15 Change
    Raw material cost 6,449 4,081 -36.7% 30,190 18,737 na
    as a % of sales 84.1% 75.2%   77.8% 75.1%  
    Staff expenses 155 140 -10.0% 793.4 614 na
    as a % of sales 2.0% 2.6%   2.0% 2.5%  
    Other expenses 373 368 -1.2% 1832 1451 na
    as a % of sales 4.9% 6.8%   4.7% 5.8%  
    Total expenses 6,976 4,589 -34.2% 32,815 20,803 na
    as a % of sales 91.0% 84.5%   84.6% 83.3%  

  • The operating margins for the quarter improved from 9.7% to 16.7% on account of decline in gas cost (as a % of sales), slightly offset by increase in staff expenses and other expenses (all as a % of sales). However, sequentially, there was a decline in the operating profit margin during the quarter.

  • The net profits for the quarter grew 27.2%. The growth in the net profit was supported by decline in depreciation expenses and lower effective tax rate. However, other income for the quarter declined 14% YoY.
What to expect?
Both volume and realizations declined for Gujarat Gas in the quarter ended March 2015. The company has been facing the issue of declining volumes for some quarters now. As domestic gas supply remains constrained, company's reliance on imported gas has gone up , thus adversely impacting volumes since industrial customers, that comprise majority of its end clients are quite price sensitive and hence likely to switch to even cheaper alternative fuels.

On the positive side, recently, the Competition Commission of India has closed anti competitive case against the company. Also, the company has been granted an authorization to lay, build, operate, or expand city or local natural gas distribution network for the geographical area of Thane (excluding areas already authorized) & Dadra & Nagar Haveli. Under this, the company has been granted 25 years of infrastructure exclusivity and 5 years of marketing exclusivity.

Post the merger of the company with GSPC, the company will be the largest CGD player and will have synergies of scale. However, it won't remain a debt free entity. At current stock price, Gujarat Gas is trading at a trailing 12 months price to earnings ratio (PE) of around 30 times which is quite expensive we believe. We recommend investors avoid buying the stock at current prices.

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