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Gujarat Gas: Margins under pressure
Jul 27, 2012

Gujarat Gas has announced its 2QCY12 results. The company has reported a 32.8% YoY growth in the topline and 46% YoY decline in net profits. Here is our analysis of the results.

Performance summary
  • Net sales for the quarter were up 32.8% on a year on year basis (YoY). The sales registered a growth of 7.2% on a quarter on quarter (QoQ) basis.
  • Operating profit for the quarter registered a 40.4% YoY decline with margins at 10.8% (9.3% in 1QCY12) versus 24.0% in 2QCY11. On a QoQ basis, the operating profits were up 25.4%.
  • Net profits for the group were down 45.9% YoY with margins at 6.7% (9.0% in 1QCY12) versus 16.1% in 2QCY11. The bottomline was down 19.9% on a QoQ basis.

Consolidated financial snapshot
Rs m 2QCY11 2QCY12 Change 1HCY11 1HCY12 Change
Net Sales 5,766 7,659 32.8% 10969.4 14,802 34.9%
Other operating income 85 66 -22.9% 173.56 163 -5.9%
Total operating income 5,852 7,725 32.0% 11,143 14,965 34.3%
Expenditure 4,448 6,888 54.9% 8,652 13,364 54.5%
Operating profit (EBDITA) 1,403 836 -40.4% 2,491 1,601 -35.7%
EBDITA margin (%) 24.0% 10.8%   22.4% 10.7%  
Other income 143 82 -42.5% 244.18 376 54.1%
Interest 0 0   0.68 1  
Depreciation 149 158 6.3% 293.94 314 7.0%
Profit before tax 1,397 760 -45.6% 2,441 1,662 -31.9%
Profit before tax margins (%) 23.3% 9.7%   21.4% 10.8%  
Tax 431 235 -45.6% 751.69 483 -35.7%
Profit after tax/(loss) 966 525 -45.6% 1,689 1,179 -30.2%
Net profit margin (%) 16.1% 6.7%   14.8% 7.7%  
Minority share 3 5 41.4% 5.35 9 69.7%
Profit after tax for the Group 963 521 -45.9% 1,684 1,170 -30.5%
Group PAT margins (%) 16.1% 6.7%   14.8% 7.6%  
No. of shares (m)         128.25  
Diluted earnings per share (Rs)*         16.1  
Price to earnings ratio (x)*         19.3  
* On the basis of trailing 12 months earnings

What has driven performance in 2QCY12?
  • The company registered a 32.8% YoY growth on account of better realizations. The volumes of gas sold declined by 4.9% QoQ. However, the sales were up 7.2% QoQ on the back of 12.8% QoQ increase in the average realizations. The overall gas sales volumes for the quarter stood at 289 mscm (million standard cubic metre) as compared to 304 mscm in 1QCY12. The average realizations for the quarter stood at Rs 26.5 per scm versus Rs 23.5 per scm in the preceding quarter.

  • The operating profits for the quarter were down by 40.4% YoY. This was due to increase in gas costs due to higher proportion of costlier imported gas and depreciation of rupee. The cost of raw materials went up to 82% (as a % of sales) during the quarter versus 68.3% in 2QCY11. Sequentially; the operating profits were up 25.4% QoQ. The EBITDA per scm stood at Rs 2.9 for the quarter, up 32% QoQ.

    Cost breakup
    Rs m 2QCY11 2QCY12 Change 1HCY11 1HCY12 Change
    Raw material 3,995 6,342 58.7% 7,794 12,296 57.8%
    as a % of Sales 68.3% 82.1%   69.9% 82.2%  
    Employee expenses 169 174 2.7% 310 326 5.2%
    as a % of Sales 2.9% 2.3%   2.8% 2.2%  
    Other expenses 284 373 31.2% 548 742 35.4%
    as a % of Sales 4.9% 4.8%   4.9% 5.0%  
    Total expenses 4,448 6,888 54.9% 8,652 13,364 54.5%
    as a % of Sales 76.0% 89.2%   77.6% 89.3%  

  • The bottomline registered 45.9% YoY decline during the quarter on account of a poor operating performance and a 42.5% YoY decline in 'Other income'. The net profit margins during the quarter stood at 6.7%, a sharp decline from 16.1% in 2QCY11. On a sequential basis, the net profit was down 19.9% QoQ due to 72% QoQ decline in 'Other income'

What to expect?
As per the management, the company has completed more than 161 km of pipeline network and has received authorization from PNGRB (Petroleum and Natural Gas Regulatory Board) for its transmission pipeline. It further expects to get authorization soon for its city gas distribution areas.

The increase in gas prices due to higher proportion of costlier imported gas seems to have affected the sales volumes and the situation is unlikely to change in the near term. The depreciation of rupee against dollar is another cause of concern for the company. We expect the margins of the company to remain under pressure.

BG Group that has around 65% stake in the company intends to divest and is already in negotiations regarding the same. The stock prices have been quite volatile because of the above mentioned reason and regulatory uncertainties regarding downstream gas sector. At current prices, the stock is trading at a trailing 12 months price to earnings multiple of 19.3x which we believe is high due to the reasons mentioned above. Hence, we maintain a cautious outlook on the stock.

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