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Gujarat Gas: Core business still strong - Views on News from Equitymaster
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Gujarat Gas: Core business still strong
Jul 28, 2006

Performance summary:
Gujarat Gas declared its results for 2QCY06 and half year ending CY06. Topline registered a growth of 34% YoY and 36% YoY during 2QCY06 and 1HCY06 respectively. However, operating margins were under pressure, for both the periods under consideration due to lower transmission income. Bottomline registered a decline of 20% YoY and 21% in 2QCY06 and 1HCY06 respectively.

Consolidated financial snapshot…
(Rs m) 2QCY05 2QCY06 Change 1HCY05 1HCY06 Change
Net sales 1,625 2,176 33.9% 3,267 4,431 35.6%
Income from services 131 75 -42.7% 276 173 -37.3%
Total operating income 1,756 2,251 28.2% 3,543 4,604 29.9%
Expenditure 1,371 1,871 36.5% 2,718 3,782 39.1%
Operating profit (EBDITA) 385 380 -1.1% 825 823 -0.3%
EBDITA margin (%) 21.9% 16.9%   23.3% 17.9%  
Other income 30 36 20.9% 189 80 -57.3%
Interest 0.3 8 2377.6% 1 15 1117.2%
Depreciation 56 77 36.1% 114 151 31.9%
Profit before tax 358 332 -7.2% 898 737 -17.9%
Tax 82 110 35.5% 286 250 -12.7%
Profit after tax 276 222 -19.8% 612 487 -20.4%
Minority interest 1 1 - 2 3 -
Net income 275.2 221 -19.8% 610 484 -20.6%
Net profit margin (%) 15.7% 9.8%   17.3% 10.6%  
No. of shares (m) 12.8 12.8   12.8 12.8  
Diluted earnings per share (Rs)* 85.8 68.8   95.1 75.5  
Price to earnings ratio (x)**   14.3        
** Based on trailing twelve months earnings.

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 2,100 kms (nearly 34% of GAIL’s gas pipeline network), the company caters to both bulk and retail 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.

What has driven performance in 2QCY06 and 1HCY06?
Robust volumes, stable realisations: Gujarat Gas registered sales volumes of 261 million metric standard cubic meters (MMSCM), a growth of 37% YoY. Thus, it has been a volume-driven show in this quarter. Realisation on the sale of gas saw a marginal decline of 2.1% YoY during 2QCY06. Retail was the driving force behind volumes, as it registered a growth of 28% YoY. Income from services (which form 3.3% of the total operating revenues), registering a decline of 410 basis points. As transmission business, which constituted 71% of income from services in 2QCY05, saw a revenue decline of 92% YoY during 2QCY06. The same is due to the fact that GSPCL has laid down its own transmission lines. Excluding transmission business revenues, services income grew by a healthy 80% YoY.

Core margins intact: Consumption of raw material increased by 36%, which is in line with the volumes growth. Excluding income from services (largely gas transmission income), as a percentage of sales, raw material costs have gone up. In our view, realisation on the distribution of natural gas (core business) was more or less stable. This signifies that it was the change in the business mix of the company that saved operating margins from falling sharply. It gets substantiated from the fact that the industrial retail segment has grown at 28% YoY in terms of volumes. Share of industrial bulk segment has reduced. The bulk customers have a greater negotiating power as compared to the retail segment. Also, the increased retail activity on the CNG front has also helped to maintain operating margins on a YoY basis (excluding income from services). However, the loss on the transmission business has lead to reduction in operating profits, which stood lower by 1% YoY. Excluding the same, operating profits rose by 28% YoY and the actual operating margin decline was 90 basis points (0.9%).

Expenditure break up…
(Rs m) 2QCY05 2QCY06 Change 1HCY05 1HCY06 Change
Consumption of raw material 1,225 1,660 35.5% 2,452 3,362 37.1%
% of sales* 75.4% 76.3%   75.0% 75.9%  
Staff cost 57 72 26.5% 101 138 37.2%
% of sales* 3.5% 3.3%   3.1% 3.1%  
Other expenditure 89 139 56.2% 166 281 69.6%
% of sales* 5.5% 6.4%   5.1% 6.4%  
* Excluding income from services.

Extraordinary effect: Other income during 1QCY05 was inclusive of one-time income on the account of settlement of dispute with the gas suppliers to the tune of Rs 127 m. Excluding the effect of the same, other income during 1HCY06 has registered a growth of 31% YoY. On a comparable basis (excluding one time benefit, transmission income and effect of VAT), net profits would have registered a growth of 38% YoY in 2QCY06. For 1HCY06, on the comparable basis, net profit is higher by 27% YoY.

What to expect?
Gujarat Gas is currently trading at Rs 1,012 at a price to earnings multiple of 9.3 times our CY08 consolidated estimates. Transmission business of the company has lead to weak operating performance over the last few quarters. Excluding this, we believe that the core business of the company is on a very sound footing.

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. Gujarat Gas plans to increase the segmental revenues from the CNG business to 10% from the current level of 5%. As far as margins are concerned, EBDITA per TSCM on the CNG front is double that of the industrial business (around Rs 4 m per TSCM). Thus, we expect operating margins to improve on the back of higher contribution from the CNG segment going forward.

On the other side, business mix of Gujarat Gas has changed tremendously over the years. In CY03, industrial (bulk) contributed 76% of the sales, which has reduced to 25% currently. Going forward, the business mix is not expected to change significantly. However, much depends on the international gas prices, which Gujarat Gas sources at international prices. Purely from a valuation perspective, we believe that the risk-return trade off is skewed towards risks in the medium-term.

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May 26, 2015 (Close)


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