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Gujarat Gas: Conference call excerpts - Views on News from Equitymaster
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Gujarat Gas: Conference call excerpts
Dec 17, 2004

We recently had a conference call with the management of Gujarat Gas, India’s largest private sector gas distribution and transmission company. We will be initiating coverage of the company in the current week and the focus of this conference call was to understand the core business activities of the company and its future prospects.

Background
Gujarat Gas is the largest private sector gas distribution company in India supplying nearly 2.2 MMSCMD (million metric standard cubic meters per day) of gas to over 150,000 customers in Gujarat through its pipelines spanning across the three major cities of Surat, Ankleshwar and Bharuch. The company owns and operates a pipeline network of over 1,800 kms. The company has further contracted 3.3 MMSCMD of gas in the transmission business, which accounts for nearly 11% of the gross realizations.

Key impressions
  • Industrial outlook:  Gujarat is amongst the most industrialized states in the country accounting for nearly 30% of the exports. The state has witnessed steady investments in energy consuming sectors such as petrochemicals, textiles and pharmaceuticals. Given the rapid expansion being seen in the textile and pharma industries, the demand supply gap has widened. Lack of adequate supply of coal, which is the primary fuel, has resulted in major pharma, power, steel and textile manufacturers considering natural gas as a viable option. The demand for natural gas therefore is likely to grow going forward. To further strengthen the argument, the Gujarat government has decided to reduce the sales tax on natural gas given the potential for the commodity in the state.

  • Supply side constraints:  Although Gujarat Gas witnessed supply constraints during the first quarter of the current fiscal due to technical reasons, the fact that the company has multiple supply sources provides adequate cushion and bargaining power. At the same time, recent new gas finds in the Cambay basin and surrounding areas have eased out supply concerns. Gujarat Gas is, in fact, now planning to expand its business into newer areas with adequate supplies.

  • Plans by Gujarat Gas:  The upcoming expansion projects in the textile industry post the quota regime coupled with consolidation in the pharma industry shall help Gujarat Gas increase its share in volumes. Further, nearly 70% of the diamonds sold in the world pass through Surat, which is the diamonds business (cutting and polishing) hub. With a strong presence in Surat (diamonds and textiles) and Ankleshwar (pharmaceuticals), Gujarat Gas is likely to ride on the changing dynamics of the business. The company has entered into bulk deals with KRIBHCO and GSFC, which would assure large volumes while at the same time, focus on retail sales such as commercial applications in hotels and restaurants and CNG, would help the company improve margins.

  • Future plans:  In order to increase consumption among the existing players, Gujarat Gas is testing newer applications of gas in the textile industry in the weaving and texturing segments while diamond-cutting applications are also being developed. Given the large market that Surat provides for the diamond industry, Gujarat Gas shall reap the benefits of these applications (if successful) in the long run. The company plans to expand its network in other industrialized regions in the state of Gujarat and has currently signed a RoU (right of usage) with Gujarat Industrial Development Corporation (GIDC) to lay gas pipelines in Vapi, which would mark the presence of the gas major across the industrial belt of the state.

  • Capex:  The company plans to invest Rs 500 m towards the gas business over the next few years to consolidate its position while expanding its CNG network to cater to the rising demand for the auto fuel in the cities.

What to expect?
Given the strong growth in demand going forward due to increasing economic activity in the sectors that Gujarat Gas caters to, the prospects of Gujarat Gas seem bright. The company witnessed a decent 12% YoY growth in the topline during 9mFY05, while the bottomline dipped by over 3% on the back of rising input costs. Going forward, we believe gas prices are likely to increase in the country and margins are likely to squeeze in the short term. However, given the future of natural gas in the country’s economic development, Gujarat Gas is likely to be a potential beneficiary.

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