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Gujarat Gas: Retail sales drive the show
Oct 25, 2007

Performance summary
  • Topline increases by 35% YoY during 3QCY07 on the back of higher retail volumes.

  • EBITDA margins expand to 21%, from 15% in 3QCY06 due to a decline in raw material cost a % of sales.

  • Other income rises by 6% YoY during the quarter.

  • Bottomline registers a growth of 83% YoY owing to operating margin expansion and higher other income.

  • Topline and bottomline grow 46% YoY and 70% YoY respectively in 9mCY07.

Standalone financial snapshot
(Rs m) 3QCY06 3QCY07 Change 3QCY06 3QCY07 Change
Net sales 1,967 2,679 36.2% 5,649 8,273 46.4%
Income from services 75 78 3.9% 265 226 -14.5%
Total operating income 2,042 2,757 35.0% 5,914 8,499 43.7%
Expenditure 1,739 2,190 25.9% 4,842 6,604 36.4%
Operating profit (EBDITA) 303 567 87.3% 1,072 1,895 76.7%
EBDITA margin (%) 14.8% 20.6% 18.1% 22.3%
Other income 34 36 5.9% 161 156 -3.0%
Interest 5 0 -95.4% 20 2 -91.8%
Depreciation 76 94 24.7% 214 273 27.4%
Profit before tax 256 508 98.4% 1,000 1,777 77.7%
Tax 71 169 139.6% 293 574 95.9%
Profit after tax/(loss) 186 339 82.8% 707 1,203 70.2%
Net profit margin (%) 9.1% 12.3% 11.9% 14.2%
No. of shares (m) 64.1
Diluted earnings per share (Rs)* 21.6
Price to earnings ratio (x)* 14.1
(* on trailing twelve months earnings)

What is the companyís business?
Gujarat Gas Company (GGCL), a 65% subsidiary of the global gas major British Gas, is Indiaís largest private sector gas distribution and transmission company and has a regional presence across three of the largest industrial cities in the state of Gujarat. With a pipeline network of over 2,100 kms (nearly 35% of GAILís gas pipeline network), the company caters to industrial (for their energy requirements), domestic (piped natural gas or PNG) and automobiles (compressed natural gas or CNG) in the cities of Surat, Ankleshwar and Bharuch. Currently, company is building pipeline network in Vapi. GGCL supplies approximately 3 million standard cubic meters per day (MMSCMD) to 1.9 lakh domestic, 2,200 commercial, 41,000 automobiles, and 650 industrial customers. GGCL pioneered the concept of gas distribution to industrial, commercial and domestic customers in Ankleshwar and Bharuch in 1989 and later expanded to Surat in 1991.

What has driven performance in 3QCY07?
Retail driven growth: The total volume of gas sold during 3QCY07 was 259 MMSCM, a marginal decline from 264 MMSCM in the corresponding quarter last year. Its Industrial segment witnessed lackluster growth due to the expiry of a gas supply contract with its suppliers and gas availability from another source was also constrained due to technical issues with their sub-surface operations. However, gas from the Tapti field expansion project has started flowing in from September, which is expected to enable the company to increase sales volumes.

On the other hand, the retail segment registered a strong growth of 22% over 3QCY06 and increased from 197 MMSCM to 240 MMSCM.

The company also sustained the robust growth witnessed in recent times in the volume and infrastructure of its CNG business. It recorded a 57% increase in volumes during the quarter on a YoY basis. The segment crossed a volume of 18 MMSCM of gas in 3QCY07.

Favorable exchange rate: It may be recalled that the rupee has strengthened by almost 10% over last quarter on a YoY basis. Raw material costs, which constituted about 75% of the sales in 2QCY06 came down to 70% of sales. This helped the company register a bottomline growth of 83% for the quarter instead of the 1%, it would otherwise have posted.

Cost break-up
(Rs m) 3QCY06 3QCY07 Change 9mCY06 9mCY07 Change
Raw materials 1,529 1,913 25.1% 4,231 5,827 37.7%
% sales 74.9% 69.4% 71.5% 68.6%
Staff cost 71 83 16.6% 208 240 15.4%
% sales 3.5% 3.0% 3.5% 2.8%
Other expenditure 139 194 39.7% 403 537 33.2%
% sales 6.8% 7.0% 6.8% 6.3%
Total cost 1,739 2,190 81.4% 4,842 6,604 86.4%
% sales 85.2% 79.4% 81.9% 77.7%

What to expect?
Gujarat Gas is currently trading at Rs 305 at a price to earnings multiple of 14 times on trailing twelve months earnings. We believe that the core business of the company is poised for decent growth going forward. Gas from the Tapti field expansion project has started to flow in September and is expected to help in recovery of volumes going forward.

The growth in industrial retail sales is at a faster pace, where the margins are expected to be better than the bulk industrial sales. Also, the CNG business, another high margin segment is expected to have a larger share in the revenue mix of the company going forward. These likely developments give an indication of sustained increased margins for the company going forward. Thus, taking into account these factors, we remain positive on the stock from a long-term perspective.

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