[T.S.R:17135] Gujarat Gas-BUY

Company has shifted its focus from bulk customer to Industrial retail and CNG segment.

Overall volume growth has seen at 17% to 1212mmscm for CY10. Volumes from industrial retail and CNG segment has increased by 20% to 1005mmscm and 18% to 122mmscm in CY10.  

Cost of sourcing natural gas will continue to increase in the future due to higher cost of RLNG and this is expected to be a continuing feature in the company's gas sourcing mix.

Management highlighted that higher cost of gas mainly RLNG will impact the operating margins in the coming quarters. However company would take necessary price revision in CNG or across the segment whenever it require, considering the alternate fuel price in various market segments that it operates in. 

We expects margin to decline marginally by 150bps to 23.5% in the coming quarter due to higher RLNG prices globally (led by high crude prices). However, the change in the business mix of the company from bulk to industrial retail and CNG segment (higher margin segment) provide cushion to protect the margins at operating level.

We expect an EBIDTA margin of 23.3% and 23.6% for CY11 and CY12 respectively. Company expects authorization from PNGRB for its existing area within a short span. Also company has submitted EOI for Bhavnagar (third round of bidding) to develop distribution business and the results for the same is expected within the three months time. 

Valuation

Long term RLNG is expected to be a counting feature in the company's gas sourcing mix which will ease the supply concern of the company. Also change in the business mix would provide further cushion to the profitability and margins. Given its monopoly on cities of Gujarat, expected volume growth plus zero debt and robust business model with no commodity risk we maintain buy ratings on GGCL with target price of Rs.481. At CMP of Rs.378 stock trades at 15.5x CY12E EPS and 3.2x P/BV.

 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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