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Gujarat Gas: Raw material blues

May 21, 2003

Gujarat Gas, the gas transmission and distribution major, recently announced its first quarter results for the financial year FY04. While the company reported a growth of about 30% in topline, bottomline was down by 18% on a standalone basis. The increase in net sales came largely on account of higher volumes of gas sold.

(Rs m) 1QFY03 1QFY04 Change
Net Sales 941 1,225 30.2%
Other Income 81 59 -27.3%
Expenditure 665 965 45.2%
Operating Profit (EBDIT) 276 260 -6.0%
Operating Profit Margin (%) 29.4% 21.2%  
Interest 25 17 -33.5%
Depreciation 27 39 46.5%
Profit before Tax 306 263 -13.9%
Extraordinary items      
Tax 94 90 -5.1%
Profit after Tax/(Loss) 211 174 -17.8%
Net profit margin (%) 22.5% 14.2%  
No. of Shares 12.8 12.8  
Earnings per share* 66.0 54.2  
P/E Ratio   6.9  

The operating profit margin of the company declined sharply by about 820 basis points. This is mainly on account of increase in expenditure (up 45% YoY). This was because of the increase in the raw material cost i.e higher prices of gas during the first quarter. Raw material accounts for about 90% of the total expenses. As a percentage of sales, the raw material costs increased from 63% in 1QFY03 to 71% in the 1QFY04. As a result of this, the operating profit also declined by 6% in the quarter. Higher operating costs also led to the decline in the operating margins for the company.

Costs as % of sales 1QFY03 1QFY04
Raw material 63.0% 71.4%
Staff costs 3.3% 3.2%
Other expenses 4.3% 4.1%

The bottomline was down by about 18%. Increase in depreciation provisioning as well as a s significant decline of about 27% in other income brought about the dip in profits However, on account of the prevailing softer interest rates, the company managed to reduce its interest outgo and thus saved the company from further decline in the bottomline.

The significant discoveries of natural gas reserves by different exploration majors is likely to buoy the country's gas reserves. This is likely to take care of the supply constraint that has been impeding the company's growth. Of course, this is a long drawn process but apart from government owned GAIL, Gujarat Gas is the only major player to have a head start in this segment.

Currently, Gujarat Gas supplies 0.9 m standard cubic metres per day (scmd) of natural gas to over 0.1 m households and a host of industrial customers, which include MNCs like Glaxo, Hoechst and Pfizer. Recently the company has entered into an agreement with NIKO for sourcing additional gas of about 0.2 m scmd. This will further add to its topline growth going forward.

At 376, the company is trading on a multiple of about 7x 1QFY04 annualised earnings, which is at a premium to the state owned GAIL. Gujarat Gas continues to focus on increasing the volumes of the gas sold and transported. However, it is the pricing of the raw material, i.e. natural gas that is the key to the company's profitability at least in the short term.

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