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Gujarat Gas: Breather period

Sep 17, 2002

Compared to the past two years, Gujarat Gas Company Ltd. (GGCL) reported staid turnover growth in the latest quarter ended June '02. After registering above 20% growth in 2Q & 3Q of FY02, YoY sales growth has been declining, especially in FY03. In 1QFY03, GGCL reported 13% YoY rise in sales.

(Rs m) 2QFY02 2QFY03 Change 1HFY02 1HFY03 Change
Net Sales 888 939 5.7% 1,715 1,880 9.7%
Other Income 46 43 -6.9% 75 124 64.2%
Expenditure 642 716 11.5% 1,234 1,381 11.9%
Operating Profit (EBDIT) 246 223 -9.4% 481 499 3.9%
Operating Profit Margin (%) 27.7% 23.7%   28.0% 26.6%  
Interest 28 25 -10.7% 55 50 -8.0%
Depreciation 27 28 2.8% 55 54 -1.6%
Profit before Tax 237 213 -10.2% 446 519 16.2%
Extraordinary items - 0   - 0  
Tax 64 113 76.0% 138 208 50.4%
Profit after Tax/(Loss) 172 99 -42.4% 308 311 0.9%
Net profit margin (%) 19.4% 10.6%   18.0% 16.5%  
No. of Shares 12.8 12.8   12.8 12.8  
Diluted earnings per share* 53.8 31.0   48.0 48.5  
P/E Ratio         9.7  

Turnover performance in FY02 was driven by higher volumes, which increased by an estimated 18% YoY to cross 1 m metric standard cubic meters/day (mmscmd). The industrial sector contributes an estimated 91% of sales. Considering the slowdown in industry over FY02, we reckon, higher volumes is likely to have been achieved through new contracts, as natural gas acquires preferred fuel/feedstock status. Having said that, volumes grew by a mere 1% YoY to an estimated 1.3 mmscmd in 2QFY03, as compared to 7.3% YoY growth in the previous quarter. In the previous fiscal, the company commenced third-party transportation of gas to Gujarat Ambuja on behalf of Gujarat State Petronet Ltd. (GSPL). However, a contract to supply gas to Search Chem, which was to commence in mid-2001, has been delayed and likely to turn operational by end 2002. The agreement with GSPL is to transport 3.3 mmscmd of gas, which expected to also commence by end 2002.

Operating margins, which increased in 1QFY03, have registered a sharp decline in quarter ended June '02 leading to a drop in operating profits. For the concerned quarter, realisations are estimated to have increased by 5% YoY. However, gas procurement costs are likely to have risen by 9.4% during the same period. Other expenditure, constituting an estimated 6% of operating costs, registered a sharp jump of 38% YoY. Consequently, margins have come under pressure. Having said that, GGCL had guided at start of the year that margins were likely to come under pressure due to increased competition and revision in gas purchase price. The gas purchase contract with Gujarat State Petroleum Corporation Ltd. (GSPCL), which meets 60% of GGCL's requirement, was reviewed in June '02 leading to higher costs.

Interest expense, YoY, has been declining for the past four consecutive quarters. During FY02, the company re-paid debt of Rs 50 m, which could be leading to the lower interest expense. Assuming, GGCL does not re-finance or re-pay debt, interest costs YoY are unlikely to decline in the next quarter.

That said, GGCL scrip on the bourses has dropped from Rs 630 levels since early 2002. Valuations, over the past two years, have declined from 18x earnings in FY01 to 12x earnings in FY02 and currently the scrip trades on a multiple of 9.7x 1HFY03 annualised earnings. Considering restructuring in the energy sources industry with de-control in prices, markets seem to be over cautious on the company. In the near-term, risks facing GGCL include gas pricing, gas availability, distribution licensing and competition.

Having said that, GGCL has access to risk mitigating avenues. As mentioned in our 1QFY03 report, the hike in gas prices is likely to be graded with complete de-control by 2004, as key consumers belong to the sensitive power and fertiliser sector. The company is diversifying the supply portfolio to mitigate supply risks. GGCL has entered into a gas purchase agreement with Gujarat State Energy Generation Ltd. for purchase of 0.1 mmscmd of gas. Also, GGCL has signed a 5-year agreement with Cairns Energy to buy 1.3 mmscmd of gas from the CB-OS/2 block in the Cambay basin, Gujarat. Gas supply was to commence in July '02 but has been delayed to end of October '02. Over the longer term, parent company -- British Gas -- is setting up a 2.6 MMTPA LNG terminal at Pipavav. GGCL has entered into a MoU for procuring 3.6 mmscmd of regassified LNG from the Gujarat Pipavav Port LNG Project. The Gujarat Gas Act will require licensing for distribution. However, provisions have been made to grant licenses to existing distribution companies in their area of operations.

The licensing regulation, depending on competition clause, will allow GGCL to acquire distribution license in other circles. Considering demand outstrips supply, the increased availability of gas is likely to drive growth going forward. Also, higher supplies will push marketing of the gas creating demand. The company has been steadily growing and enjoys strong lineage. In FY02, GGCL declared special dividend of Rs 32.5/ share. We maintain, while short term hiccups could unnerve markets, long term fundamentals of the company look strong.

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