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Gujarat Gas: Strong show, amidst blips - Views on News from Equitymaster
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Gujarat Gas: Strong show, amidst blips
Oct 28, 2005

Performance Summary
Gujarat Gas announced its results for the third quarter ended September 2005 (December ending company). While the topline during the quarter grew by 18% YoY, operating profit margins declined on a consolidated basis, even as the standalone margins improved signifcantly. With the commissioning of the GSPCL pipeline, there has been a decline in transmission revenues.

Consolidated financials…
(Rs m) 3QCY04 3QCY05 Change 9mCY04 9mCY05 Change
Net sales 1,631 1,923 17.9% 4,915 5,466 11.2%
Expenditure 1,286 1,545 20.2% 3,991 4,264 6.8%
Operating profit (EBDITA) 345 378 9.4% 924 1,203 30.2%
EBDITA margin (%) 21.1% 19.6%   18.8% 22.0%  
Other income 18 45 151.7% 91 107 17.2%
Interest 0 0 -85.4% 1 1 54.6%
Depreciation 50 61 22.7% 145 176 20.8%
Profit before tax 313 361 15.6% 869 1,132 30.4%
Extraordinary items - -   - 127  
Tax 118 121 2.9% 323 408 26.2%
Profit after tax 195 240 23.3% 545 852 56.1%
Minority interest 2 1 -52.2% 4 3 ####
Net income 193 239 24.0% 541 849 56.9%
Net profit margin (%) 11.9% 12.5%   11.1% 15.6%  
No. of shares (m) 12.8 12.8   12.8 12.8  
Diluted earnings per share (Rs)* 60.1 74.6   56.3 88.3  
Price to earnings ratio (x)         12.5  
(* annualised)            

What is the company's business?
Gujarat Gas Company, a 65% subsidiary of the global gas major British Gas, is India’s 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 2,000 kms (nearly 34% of GAIL’s gas pipeline network), the company caters to industrial (for their energy requirements), domestic (piped natural gas or PNG) and automobile industry (compressed natural gas or CNG) requirements in the cities of Surat, Ankleshwar and Bharuch. The company has witnessed a steady growth in natural gas sales of 18.6% CAGR since FY98 while the bottomline has grown at a compounded rate of 30.2% during this period. Apart from gas distribution, the company also transmits gas for other players through its additional pipeline capacity and has transmitted 2.2 MMSCMD (million metric standard cubic meters per day) of gas in FY05 (9.4% of gross revenues).

What has driven performance in 2QFY06?

Transmission revenues nil:

Mixed show at the operating level: While raw material cost to sales in the third quarter has increased, the same in 9mCY05 is significantly lower. This, we believe, is largely due to the absence of any transmission revenues in 3QCY05 as compared to the last two quarters. But we have an upward bias as far as the company's operating margin is concerned owing to fact that as the retail contribution increases from 2% of revenues in CY04 to 10% in another two to three years, the overall realisation growth will aid margin expansion. We are positive on this development and have factored in around 2% CAGR increase in gas cost. That said, there are downside risks to our gas cost assumption.

The costs side…
(%) of sales 2QFY05 2QFY06 9mCY04 9mCY05
Consumption of raw materials 71.1% 72.9% 73.7% 70.5%
Staff cost 3.4% 3.1% 3.1% 2.9%
Other expenditure 4.4% 4.4% 4.4% 4.6%

Low tax incidence: Like any other corporate, GGAS has benefit from lower tax incidence at the net profit level (400 basis fall in the third quarter). The sharp rise in depreciation charges is on account of Rs 1.6 bn capital expenditure the company is incurring towards retail expansion. This, we believe, will improve margins going forward. Overall, barring for higher than expected tax benefits, the performance of the company is in line with our estimates for the full year.

What to expect?
The stock currently trades at Rs 1,099 implying a price to cash flow multiple of 7.6 times our consolidated CY08 earnings estimate. We had recommended a HOLD on the company at Rs 1,118 with a target price of Rs 1,450 with a two to three year perspective. We maintain our view.

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