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Gujarat Gas: It's volume and forex - Views on News from Equitymaster

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Gujarat Gas: It's volume and forex
Jul 27, 2007

Performance summary
  • Topline grew by 26.6% YoY on the back of increased volume

  • A relatively lower increase in expenditure of 15% resulted in an improved EBITDA margin of 24.8% for the quarter as against 17.5% in the corresponding quarter last year

  • Bottomline grew by 90.6% YoY. Excluding one-time items and the impact of exchange rate, the increase was 30% YoY

Financial snapshot

(Rs m) 2QCY06 2QCY07 Change 1HCY06 1HCY07 Change
Net sales 2,176 2,754 26.6% 4,431 6,080 37.2%
Income from services 76 80 5.4% 174 142
Total operating income 2,252 2,835 25.9% 4,605 6,221
Expenditure 1,872 2,152 15.0% 3,783 4,921 30.1%
Operating profit (EBDITA) 380 682 79.5% 823 1,300 58.1%
EBDITA margin (%) 17.5% 24.8% 18.6% 21.4%
Other income 36 47 31.5% 80 85 5.9%
Interest (net) 8 0 -97.2% 15 1 -95.9%
Depreciation 77 95 23.6% 151 185 22.9%
Profit before tax 332 635 91.2% 737 1,200 62.7%
Tax 110 212 92.4% 250 401 60.3%
Profit after tax/(loss) 222 422 90.6% 487 799 64.0%
Minority interest 1 3 178.2% 3 3
Net income 221 420 90.3% 484 796
Net profit margin (%) 10.1% 15.2% 10.9% 13.1%
No. of shares (m) 64.1 64.1 64.1 64.1
Diluted earnings per share (Rs)* 13.8 26.2 15.1 24.8
Price to earnings ratio (x)** 15.6
* annualised, ** on trailing twelve months earnings

What is the companyís business?
Gujarat Gas Company (GGCL), a 65% subsidiary of the global gas major British Gas, is Indiaís largest private sector gas distribution and transmission company and has a regional presence across three of the largest industrial cities in the state of Gujarat. With a pipeline network of over 2,100 kms (nearly 35% of GAILís gas pipeline network), the company caters to industrial (for their energy requirements), domestic (piped natural gas or PNG) and automobiles (compressed natural gas or CNG) in the cities of Surat, Ankleshwar and Bharuch. Currently, company is building pipeline network in Vapi. GGCL supplies approximately 3 million standard cubic meters per day (MMSCMD) to 1.9 lakh domestic, 2,200 commercial, 41,000 automobiles, and 650 industrial customers. GGCL pioneered the concept of gas distribution to industrial, commercial and domestic customers in Ankleshwar and Bharuch in 1989 and later expanded to Surat in 1991.

What has driven performance in 2QCY07?
Volumes growth: The total volume of gas sold during the quarter was 268 mscm out of which 24.5 mscm was purchased on spot basis.

The retail segment registered a strong growth of 18% over the corresponding quarter last year and increased from 181 mmscm (million standard cubic meters) to 214 mmscm.

The company also sustained the robust growth witnessed in recent times in the volume and infrastructure of its CNG business. It recorded a 50% increase in volumes during the quarter on a YoY basis. Two new CNG stations were commissioned. One of them was with the Gujarat State Road Transport Corporation. The number of vehicles running on CNG in the area of operation of Gujarat Gas crossed 50,000.

In the industrial segment, the focus was on growth areas and industrial clusters as was witnessed in the Jhagadia industrial estate where the total volume of gas contracted crossed 0.5 mmscmd.

Favorable exchange rate: It may be recalled that the rupee has strengthened by 9.3% over last quarter on a YoY basis. Raw material costs, which constitute about 78% of the sales in 2QCY06, grew by only 13% - much lower than the volume growth of 27%. This helped the company register a bottomline growth of 90% for the quarter instead of the 30% it would otherwise have posted.

Cost break-up
(Rs m) 2QCY06 2QCY07 Change 1HCY06 1HCY07 Change
Raw materials 1,648 1,861 12.9% 3,374 4,411 30.7%
% sales 75.7% 67.6% 76.1% 72.6%
Staff cost 72 82 13.9% 139 159 14.7%
% sales 3.3% 3.0% 3.1% 2.6%
Other expenditure 152 209 37.4% 271 351 29.8%
% sales 7.0% 7.6% 6.1% 5.8%
Total cost 1,872 2,152 15.0% 3,783 4,921 30.1%
% sales 86.0% 78.1% 85.4% 80.9%

What to expect?
Gujarat Gas is currently trading at Rs 289 at a price to earnings multiple of 15.6 times on trailing twelve months earnings. We believe that the core business of the company is poised for decent growth going forward. In order to support its growth plans, the company had contracted to buy 1.65 mscmd of gas, which will be available from 3QCY07.

The growth in industrial retail sales is at a faster pace, where the margins are expected to be better than the bulk industrial sales. Also, the CNG business, another high margin segment is expected to have a larger share in the revenue mix of the company going forward. These likely developments give an indication of sustained increased margins for the company going forward. Thus, taking into account these factors, we remain positive on the stock from a long-term perspective.

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