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Gujarat Gas: Conference call extracts

Jun 19, 2006

We recently had a conference call with the management of Gujarat gas to gauge the growth prospects of the gas distribution sector in the long-term. Following are the key excerpts of the same.

About the company
Gujarat Gas Company (GGC), a 65% subsidiary the global major BG group, is India’s largest private sector gas distribution and transmission company. Company has a presence across the three major industrial cities of Surat, Ankleshwar and Bharuch. With a pipeline network of over 2,000 kms (nearly 34% of GAIL’s gas pipeline network), the company caters to industrial (for their energy requirements), domestic (piped natural gas or PNG) and automobile industry (compressed natural gas or CNG) requirements. GGCL supplies approximately 3 million standard cubic meters per day (MMSCMD) to 170,000 domestic (addition of 20,000 in a year), 2,200 commercial 30,000 automobiles, and 650 industrial customers.

The key takeaways…
Expansion to Vapi: Gujarat Gas plans to complete the pipeline expansion to Vapi (a major industrial city) in the next two months and cater to its demand. However, the management said that the monsoon could result in delay in implementation. The company expects to market 5 lakh cubic meters of gas to the region going forward.

On the transmission business: Transmission revenues took a hit post GSPCL (Gujarat state petroleum limited) decision to lay its own pipeline for transmitting natural gas. Gujarat Gas, during 1QCY06, has registered zero transmission volumes thereby affecting transmission volumes. However, the management plans to overcome the losses on the transmission segment via aggressive growth in retail and CNG business. Talking about the prospects of the transmission business, the management opined that they might enter into new contracts for transmission in the future. We have not factored the same in our assumptions.

On CNG: Gujarat Gas currently operates 15 CNG outlets (majority in Surat). Also, the government of Gujarat has made CNG mandatory for the auto rickshaw from 1st January 2006, which has had a positive impact on volumes (incremental additions is likely to be lower). To capture the required scale of operations, the company plans to double its CNG outlets. The management also said that its thruput per outlet is roughly in the range of 12,000 kgs to 15,000 kgs. Gujarat Gas plans to increase the segmental revenues from the CNG business to 10% from the current level of 5%. Speak about the margins in the segment, EBDITA per TSCM on the CNG front is double that of the industrial business (around Rs 4 m per TSCM).

On the recent acquisition of a Cogen power plant: Gujarat Gas recently acquired business of cogeneration of power from BG India Energy Services Private limited. The acquisition, worth Rs 109 m, was done at net asset value (NAV). The acquired plant has a capacity of 20 MW. In the long-term, the company hopes to add around 20 MW per annum at a cost of Rs 600 m per annum (these units are for captive consumption for small to medium enterprises and the ticket size of the captive facility can be as small as 4 MW). While the company will be running and managing such captive units (for which it will earn a lease income), it also aims at selling natural gas to power the cogen facility. The management expects to earn an internal rate of return of 15% from the project. We have not factored in lease income or additional gas sales from this cogen operations in our estimates.

The supply side: Gujarat Gas has contracts to the extent of 3.5 MMSCMD (million metric standard cubic meters per day) and has not signed any new contracts during the previous calendar year. The management does not foresee new gas supplies (from ONGC fields and Reliance KG basin) over the next 2 to 3 years. Unless the company increases the gas contract size, growth will be an issue after two years.

On the business mix: Gujarat Gas caters to two different markets segments viz. bulk and retail segment. The bulk segment contributes volumes, while the retail segment drives margins. During CY02, bulk contributed 76% of the business mix with retail contributing the remaining. The mix has changed currently to bulk contributing 25% of the total volumes and the retail contributing the remaining. The management of the Gujarat gas expects to maintain the bulk contribution in the range of 25% to 30% and remaining from the retail segment.

On capex plans: The company expects to spend around Rs 1.1 bn during the CY07, of which Rs 600 m will be towards the cogen facility.

Performance during the last quarter…
In 1QCY06, the company’s performance was commendable on the core business fronts. Gujarat Gas registered a growth of 37% (on consolidated basis) in the topline during the quarter. However, income from services decreased by 33% during the quarter owing to lower transmission revenues. In 1QCY06, transmission income fell from Rs 101 m to Rs 66 m (including Rs 46 m attributable to previous year). 1QCY05 also included one time settlement of Rs 127 m. If one were to exclude the same, sales have registered a growth of 49% YoY and increase of 27% in net profits. Putting all these things in perspective, it is quiet evident that the company is not facing any sort of pricing pressure (excluding the losses on the transmission segment). The company has registered a 21% decrease in the bottomline due to the aforesaid reasons coupled with other income falling by 72% YoY. However, on a comparable basis (excluding one-time incomes and transmission revenues), PBDIT grew by 13.5%.

Consolidated financial performance
(Rs m) 1QCY05 1QCY06 Change
Net sales 1,643 2,255 37.3%
Income from services 145 98 -32.5%
Expenditure 1,347 1,911 41.8%
Operating profit (EBDITA) 441 443 0.4%
EBDITA margin (%) 26.8% 19.6%  
Other income 159 44 -72.0%
Interest 1 8 -
Depreciation 58 74 27.8%
Profit before tax 540 405 -25.0%
Extraordinary items - - -
Tax 205 140 -31.8%
Profit after tax 335 266 -20.8%
Minority interest 1 2 -
Net income 335 264 -21.2%
Net profit margin (%) 20.4% 11.8%  
No. of shares (m) 12.8 12.8  
Diluted earnings per share (Rs)*   82.2  
Price to earnings ratio (x)   12.3  
(* annualised)      

What to expect?
Gujarat Gas is currently trading at Rs 1,012 at a price to earnings multiple of 9.9 times our CY08 consolidated estimates. Gujarat gas has a sound business strategy, which is largely volume driven. As mentioned earlier, we expect operating margins to improve on the back of higher contribution from the CNG segment going forward. Even though valuations are reasonable, in our view, Gujarat Gas is relatively risky than Indraprastha Gas owing to the fact that the company sources gas at international prices, which are uncertain. If input costs increases significantly, the company may not be able to pass on the same to the consumer, which would impact margins. In this backdrop, the risk-return trade off is skewed towards risks in the medium-term.

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