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Gujarat Gas: High gas costs dent margins - Views on News from Equitymaster

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Gujarat Gas: High gas costs dent margins
Nov 4, 2011

Gujarat Gas has announced its 3QCY11 results. The company has reported a 29% YoY and 43% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net sales growth slows down to 29.1% YoY in the quarter from 41% YoY during 2QCY11. For the first nine months, the topline was up 33%.
  • Operating profit registers a growth of 30.5% YoY. The margins during the quarter stood at 18.0%, down from 24.3% in the previous quarter (2QCY11). However, margins improved slightly by 0.2% on an annual basis. For the first 9 months, the growth in operating profits and margins stood at 28.2% YoY and 20.8% (versus 21.14% in the corresponding period last year) respectively.
  • Bottomline registers a growth of 42.7% YoY during the quarter with margins at 12.4%, up 1.2 % (YoY).However, margins were down 4.4% on a sequential basis .For the 9 months period; the net profits were up 41.7% YoY with margins at 14.1% (up 0.9% YoY).
  • The company has declared an interim dividend of Rs 10 per share.

Consolidated financial snapshot
(Rs m) 3QCY10 3QCY11 Change 9mCY10 9mCY11 Change
Net sales 4,985 6,435 29.1% 13,093 17,404 32.9%
Other operating income 86 98 14.3% 265 272 2.4%
Total operating income 5,071 6,533 28.8% 13,358 17,676 32.3%
Expenditure 4,168 5,354 28.5% 10,495 14,006 33.5%
Operating profit (EBDITA) 903 1,179 30.5% 2,863 3,670 28.2%
EBDITA margin (%) 17.8% 18.0%   21.4% 20.8%  
Other income 50 112 124.7% 147 356 142.8%
Interest 0 0 0.0% 4 1 -73.1%
Depreciation 138 153 11.3% 400 447 11.8%
Profit before tax 815 1137 39.5% 2606 3578 37.3%
Profit before tax margins (%) 16.1% 17.4%   19.5% 20.2%  
Tax 250 328 31.2% 841 1080 28.4%
Profit after tax/(loss) 565 809 43.1% 1765 2498 41.5%
Net profit margin (%) 11.1% 12.4%   13.2% 14.1%  
Minority share 1 4 208.6% 9 10 9.1%
Profit after tax for the Group 564 805 42.7% 1,756 2,488 41.7%
Group PAT margins (%) 11.1% 12.3%   13.1% 14.1%  
No. of shares (m)         128.25  
Diluted earnings per share (Rs)*         25.8  
Price to earnings ratio (x)*         16.9  
* On the basis of trailing 12 months earnings

What has driven performance in 3QCY12?
  • The growth in the net sales was on the back of increase in volumes of gas sold (326 million standard cubic metres/mscm versus 302 mscm in the preceding quarter) and hike in Industrial gas prices in the beginning of September. The CNG segment gas sales volumes were up 16% YoY with about 8,400 vehicles opting for CNG conversion. The domestic gas sales volumes were up 9% YoY as more than 4900 households connected to gas supply.

  • The operating margins declined sequentially due to increasing share of costlier imported natural gas and adverse impact of rupee depreciation (versus the dollar). Both the factors offset the impact of hike in selling prices.

  • The net profit margins were also down sequentially due to high gas cost that offset the decline in depreciation costs (as a% of sales) and decline in effective tax rates during the quarter.

What to expect?
The company's application for authorization of current areas of operation and new area in Gujarat is still pending with Petroleum and Natural Gas Regulatory Board. The management has expressed concerns over increasing share of costlier RLNG (regasified liquid natural gas). Further with markets maturing, the industrial volumes growth rate may slow down. We expect it will not be that easy for company to offset rising gas costs by going for price hikes as such a step will face consumer resistance. The margins will also get adversely impacted of rupee continues to decline w.r.t dollar.

At a stock price of Rs 437, the stock is trading at price to earnings ratio (on the basis of trailing 12 months earnings) of 19. We are in the process of updating our projections and will update our subscribers very soon.

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