• DECEMBER 2, 2004

Gujarat Gas: Subdued performance…

Performance Summary
Gujarat Gas, the country’s largest private sector gas distribution company posted lackluster performance during 3QFY05 with a topline growth of nearly 5% and the bottomline witnessing a growth of only 3%. However, the company improved its operating margins by 250 basis points.

What is the company’s business?
Gujarat Gas is a regional private sector gas distribution player with operations confined to the three major industrial cities in Gujarat, namely, Surat, Bharuch and Ankleshwar. The company has a large regional pipeline network spanning over 1,800 kms and supplying nearly 2.2 MMSCMD (million metric standard cubic meters per day) of gas to nearly 145,000 domestic, 1,800 commercial and 475 industrial consumers. While the commercial and industrial consumers account for over 90% of the volumes, the domestic consumers served at the retail level, ensure better margins in the business.

(Rs m)3QFY043QFY05Change9mFY049mFY05Change
Net sales 1,346 1,411 4.8% 3,724 4,177 12.1%
Expenditure 1,095 1,112 1.6% 2,950 3,358 13.8%
Operating profit (EBDITA) 251 299 18.9% 774 819 5.7%
EBDITA margin (%)18.7%21.2% 20.8%19.6% 
Other income 17 11 -34.9% 125 75 -39.9%
Interest 0 0 87.9% 19 1 -96.5%
Depreciation 41 45 8.7% 120 129 8.0%
Profit before tax 227 265 16.7% 761 765 0.5%
Tax 72 105 46.4% 262 281 7.4%
Profit after tax/(loss) 155 159 2.9% 499 483 -3.2%
Net profit margin (%)11.5%11.3% 13.4%11.6% 
No. of shares (m) 12.8 12.8   12.8 12.8  
Diluted earnings per share (Rs)* 48.3 49.7   51.9 50.3  
Price to earnings ratio (x)  10.9    10.8  
(* annualised)      

What has driven performance in 3QFY05?
Regional focus hampers growth: Gujarat Gas has a strong presence in the three main industrial regions of Surat, Bharuch and Ankleshwar. The topline growth of 5% during the 3QFY05 could be attributed to the fact that the company has limited potential in these areas and is therefore vying for other support businesses such as CNG. The current growth could be attributed to the pick up in the industrial activity in the region.

(%) of sales3QFY043QFY059mFY04 9mFY05
Consumption of raw materials73.1%70.1%71.3%72.0%
Staff cost3.3%3.8%3.3%3.5%
Other expenditure4.9%4.8%4.5%4.9%

Raw material surprise: Gujarat Gas has been successful in improving its operating margins by 250 basis points on the back of better cost control. Raw material prices, which constitute nearly 89% of the total expenditure, have dipped by 300 basis points. This decline in raw material cost is surprising considering the rise in gas prices in the global markets and also the fact that Gujarat Gas sources a large part of its gas requirements from private players. While staff costs have increased marginally, other expenditure has remained more or less stable thereby resulting in higher operating margins.

Other income and interest costs play spoilsport: Gujarat Gas witnessed a marginal growth of 3% in the bottomline during 3QFY05. But for a dip of 35% in other income and a higher interest obligation during the current quarter, the bottomline could have posted a better picture.

QoQ Trend
  4QFY04 1QFY05 2QFY05 3QFY05
Sales 1,411 1,365 1,401 1,411
(%) YoY growth -3.3%2.6%0.8%
Op. Profits 256 267 253 299
(%) OPM18.1%19.6%18.1%21.2%
Net profit 145 159 166 159
(%) NPM10.3%11.6%11.8%11.3%

Quarterly sigh: A look at the quarterly performance shows that Gujarat Gas has been able to improve its operating margins during the latest quarter on account of better control over costs. However, on the sales front, the company seems to witness a saturated market for the time being as major sources of gas production are yet to start delivery, limiting current supplies and growth potential in CNG.

What to expect?
At Rs 543, the stock is trading at a price to earnings multiple of 10.9 times annualized 3QFY05 earnings. Gujarat Gas has shown its intent to increase its presence in the auto segment with CNG business holding a lot of promise. The company is also planning to enter into other industrial areas such as Vapi. However, given its regional presence, growth seems to be limited as compared to GAIL, which operates on a larger scale and is one of the suppliers of gas to Gujarat Gas.

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