[T.S.R:10954] gujarat gas - report

Gujarat Gas Ltd

INVESTMENT RATIONALE

Gujarat Gas Company Ltd, a subsidiary of the BG Group, was incorporated in 1988 and is the largest consumer gas distributor operator in India. It has strong presence in the highly industrialized parts in Gujarat namely, Surat, Bharuch and Ankleshwar and has strong pipeline network of 2700 km. Company which supplies about 3 mmscmd natural gas is planning to expand in other areas such as Vapi. It sources gas mainly from GAIL, Niko, GSPL, Cairn and PMT  consortium. Moreover, it is set to get natural gas from Reliance's KGD6 fields which will further boost the top line visibility of the company.

The company announced better numbers in Q2CY09. Higher volume & marketing margin coupled with lower other expenditures boost profitability for the Gujarat Gas reported Q2CY09 at Rs 47.6crore up 30.2% q-o-q. Sales and volume were inline with our expectations. Volume improved 7.3% q-o-q to 249mmscm on account of 0.7mmscmd of spot purchase from Petronet in June.
However the volume declined 5.7% y-o-y due to lower level of supply from PMT & Cairn gas field. Volume is growth is back on the track after last few quarters growth was hampered due to lower availability of domestic gas.

Concern on gas supply is minimal given the lower global gas prices and higher
availability of KG D6 gas for other industries. In one of the measure to boost liquidity, company has announced issue of bonus shares in the ratio of 1:1. Higher OPM due to tariff revision – Volume increased to 2.7mmscmd on the
back of spot purchase of 0.7mmscmd. Price hike done in Feb'09 to counter rupee depreciation and lower other expenses improved EBITDA 35% q-o-q to
Rs 75.7crore. Average realizations surged considerably to Rs13.6/scm, 15.6%
y-o-y increase. Operating margin improved by 403bps q-o-q to 22.3% Other income was lower by 63.0% y-o-y to Rs 6.6crore. Net profit improved 30.1%
q-o-q and 8.0% y-o-y to Rs 47.6crore

Key Developments

Gujarat Gas fixes September 19, 2009 as Record Date for Bonus Issue The company has announced Bonus Equity Shares in the ratio of one equity share of the Company of Rs. 2/- each for every one equity share of the Company held and fixed September 19, 2009 as the Record Date for determining the eligibility of the Shareholders entitled to the bonus shares.

GAIL supplies to Gujarat Gas restored Thanks to reduction in the volume of PMT gas supplied by GAIL to the company it could supply only 68% of the daily contracted volume in July to its over 800 industrial gas customers. Further, company was also forced to buy gas from the spot market at higher rates and charge more for the quantity supplied beyond the RSL (Restricted Supply Level). The volume of gas supplied by GAIL to the Company from the PMT fields, however, have been restored approximately to the levels of gas supplies prior to the notification of the Force Majeure event at the oil evacuation system of the Panna and Mukta fields.

 

Operating margins expand:

Company has started sourcing LNG due to lower global LNG prices and expects
higher spot gas purchase to meet the requirement. Current volume is ~3.2mmscmd and expects to remain at the same level for the next quarter also. It has not yet allocated gas from KG D6 basin whereas CGD players in Maharashtra and Delhi are getting 0.3mmscmd of KG D6 gas. It could be due to the MoPNG's view to allocate initial gas to PNG and CNG customers compared to Industrial retail customers which constitute 85% of sales volumes for Gujarat Gas. However, the issue is being under discussion with PNGRB, which believes customers using up to 50,000scmd are eligible for KG D6 gas.

 

Our View

We estimate Gujarat Gas to report strong earnings (CAGR of 15%) over CY2009-10 primarily driven by the higher gas volume, lower global LNG prices and hike in tariff revision. Demand in the Surat-Bharuch belt is increasing and management has already indicated that they can distribute 4.5mmscmd without incurring significant additional capex. Company is awaiting authorization letter from PNGRB on its EoI filled for Bhavanagar and Kutchh region.

We maintain our positive view on Gujarat Gas as it will be beneficiary in the gas chain of additional volumes and less concern on gas supply in near term. It is one of our preferred pick in CGD space given its robust business model (focused on Industrial Customers compared to CNG and PNG customers), technical leverage from parent British Gas and expansion opportunities within Gujarat. However, we maintain our recommendation to HOLD the stock with revised price target of Rs 450, 12.6x our CY10E EPS of Rs 33.2, giving an upside potential of 7.1%. We expect limited downside from this level and expect more institution participation going forward. Key risk to our price target is 1) Fail to source LNG supply 2) PNGRB approved MoPNG's claim of distributing KG D6 gas only to PNG and CNG customers 3) Lower than expected allocation from KG D6 gas 4) Reversal of tariff hike.

 

 

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