Gujarat Gas: Volumes led growth

Gujarat Gas, the leading player in the gas distribution business reported its half yearly results recently. The company reported a 23% growth in the topline while its bottomline spurted by about 72% during 2QFY04. On a half yearly basis, while the topline increased by about 27%, the bottomline was up by about 11%.

(Rs m)	2QFY03	2QFY04	Change	1HFY03	1HFY04	Change
Net Sales	939	1,153	22.8%	1,880	2,378	26.5%
Other Income	43	50	16.7%	124	109	-12.1%
Expenditure	716	890	24.3%	1,381	1,855	34.3%
Operating Profit (EBDIT)	223	263	18.0%	499	523	4.7%
Operating Profit Margin (%)	23.7%	22.8%		26.6%	22.0%
Interest	25	2	-90.4%	50	19	-61.9%
Depreciation	28	40	42.8%	54	78	44.6%
Profit before Tax	213	271	27.4%	519	534	3.0%
Tax	113	100	-11.7%	208	190
Profit after Tax/(Loss)	99	171	71.9%	311	345	10.9%
Net profit margin (%)	10.6%	14.8%		16.5%	14.5%	-12.3%
No. of Shares	12.8	12.8		12.8	12.8
Earnings per share*	31.0	53.3		48.5	53.7
P/E Ratio		8.7			8.7
*(annualised)

Gujarat Gas witnessed an 85% increase in volumes of gas sold during the 2nd quarter whereas its transportation volumes witnessed a significant increase of about 477% during the same period and this resulted in increase in topline by about 23%. During the current year, the company has sourced 1.7 lakh standard cubic meters per day (scmd) from NIKO's Beema field. This would later be increased to about 5-lakh scmd. This would drive the growth in the volumes going forward.

Expenses also increased in line with the rise in volumes. As a percentage of sales, rise in total expenses were marginally higher during the second quarter and this resulted in a marginal dip in the operating profit margin (down 90 basis points). However the operating profit margin during the first half of the year witnessed a decline by about 460 basis points mainly on account of increase in raw material cost during the 1QFY04. We believe that in the first quarter the company's incremental demands for gas may have been met at a higher cost, thus impacting the margins adversely.

Gujarat Gas retired most of its debt during the current quarter and this resulted in the company becoming almost debt free. Interest expenses were down by about 90% during the current quarter and this led to higher bottomline growth. This apart, an increase in volumes also led to an increase in bottomline, which was up significantly by about 72% during the quarter. However the depreciation was up by about 43% an this restricted growth in bottomline to some extent.

At Rs 465, the stock is trading at a P/E multiple of 8.7x its 1HFY04 annualised earnings. Gujarat Gas is a pioneer in the gas retailing business in the state of Gujarat (mainly in Surat, Bharuch and Ankleshwar). Recent discoveries of natural gas in the state of Gujarat poses further potential for the company in terms of higher volumes going forward. Also a shift towards cleaner natural gas as an alternate source of energy will see demand increasing towards this business and may drive growth for the company.