Gujarat Gas: Why this premium? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Gujarat Gas: Why this premium?

Oct 18, 2004

Natural gas is fast becoming a major source of energy, given the fact that alternative fuels such as oil are resulting in higher costs for the industry. Growing dependence on oil imports again tilts the balance in natural gas’ favour, as it is a relatively cheaper source as against oil. Given the growing importance of natural gas in the country, GAIL, the dominant player with a near monopoly is likely to benefit going forward. The company has an integrated business model whereby it supplies gas to the power and fertilizer industry and at the same time, utilizes gas for the manufacturing of LPG (liquefied petroleum gas) and petrochemicals. Also, GAIL is a primary source of gas supply for regional retail players such as Gujarat Gas and Indraprastha Gas.

Having said that, GAIL should command a premium over Gujarat Gas, which to a certain extent, is dependent on GAIL for gas supply and has its business restricted to only Gujarat, while GAIL has a network spread over 4,800 kms and covering the major industrial belt in the country. However, that is not the case, as Gujarat Gas continues to command a premium over GAIL, largely due to its private entity status.

P/E FY02 FY03 FY04
GGAS 12.9 12.8 10.1
GAIL 4.9 3.9 8.8

Let us look at the factors that help Gujarat Gas command a premium:

  • Private entity: Gujarat Gas is a private entity with nearly 65% of the shareholding with British Gas. The company has been successful in spreading its retail business in the state of Gujarat and has also assured a monopoly in its area of operations, as the state government shall not allow more than one player in the region. This private entity status helps the company in the sense that there is no political interference and as a result, lack of bureaucracy helps make quick decisions. Also, the company operates in a strong industrial belt, which helps in creating more business opportunities.

  • No subsidies: As against GAIL, Gujarat Gas need not contribute towards the Gas Pool Account, which is utilized to compensate gas producers for selling gas as a subsidized rate (OIL India). At the same time, it need not contribute towards the LPG and kerosene subsidy burden. To put things in perspective, GAIL contributed nearly Rs 4.3 bn towards the subsidy burden during FY04 and this trend continues during the current fiscal also, with the company having contributed nearly 2.3 bn.

  • New avenues: The court recently declared that public transportation in Surat should be converted to CNG. This is likely to benefit Gujarat Gas going forward, given the company’s infrastructure and gas purchase agreements. Also, Gujarat Gas is riding high on the fact that the state witnesses power cuts and this is likely to result in industries setting up captive power plants. This could result in higher offtake of gas. Currently, Gujarat Gas has an encouraging portfolio with over 70% of the gas sold towards retail businesses (higher margins) and the balance towards bulk customers (assured volumes) The company is further reducing its dependence on GAIL for gas purchase and has entered into contracts with Cairn Energy.

At Rs 463, the stock is trading at a P/E multiple of 9.4x 2QFY05 annualized earnings. Going forward, the company is likely to enter into newer areas such as Vapi industrial belt and is also eyeing the CNG market in Surat and Ankleshwar. Also, the captive power projects are likely to result in assured volumes going forward. Having said that, the cost of the natural gas purchased is likely to rise, as the company has entered into contracts with Cairn Energy (which shall provide natural gas at international rates) and is currently eyeing gas from Petronet LNG (which is expensive as against natural gas supplied by GAIL). All in all, margins are likely to come under pressure as a result of these agreements.

Equitymaster requests your view! Post a comment on "Gujarat Gas: Why this premium?". Click here!

  

More Views on News

5 Green Energy Stocks to Watch as India Readies for a Revolution (Views On News)

Oct 13, 2021

The excitement around green energy stocks has opened up a huge contrarian opportunity in the traditional energy space.

Top Performing PSU Stocks over the Past One Year (Views On News)

Oct 1, 2021

After a decade of underperformance, PSU stocks have woken up. Here are the best performing PSUs of past twelve months.

Linde India Shares Hits New High. Up 230%+ in One Year (Views On News)

Aug 26, 2021

Linde India shares have surged sharply in the past few trading sessions. What's causing the rally?

ONGC Logs Massive Jump in Net Profit as Crude Oil Prices Double (Views On News)

Aug 16, 2021

Rising crude oil prices compensate ONGC's fall in production.

HPCL Shares Under Pressure After Profit Declines in June Quarter (Views On News)

Aug 5, 2021

Rising crude oil prices and forex woes weigh on HPCL's quarterly numbers.

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

How to Find Your Next 10-Bagger in this Market (Profit Hunter)

Nov 19, 2021

The #1 make or break factor in your portfolio you shouldn't ignore.

MobiKwik IPO Opens for Subscription Soon. Key Things to Know Before Subscribing. (Views On News)

Nov 20, 2021

The Rs 19 bn issue is set to hit the market soon.

More

Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

GUJARAT GAS COMPANY SHARE PRICE


May 26, 2015 (Close)

TRACK GUJARAT GAS COMPANY

  • Track your investment in GUJARAT GAS COMPANY with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
  • Add To MyStocks

MARKET STATS