Gujarat Gas (GGCL) Q2CY09 results came better than our expectations. While revenues increased by 9% y-o-y, from Rs3.1 billion in Q2CY08 to Rs3.4 billion in Q2CY09, net profit grew by 8% over the same period, implying a deviation of 20% from our estimates.
The outperformance is explained by lower gas and ’other’ expense and an improvement in realisation by 16% y-o-y on account increased contribution of retail in the sales mix.
This has cumulatively expanded the operating margins by 390bps y-o-y. Distributed volumes were higher on a q-o-q basis, on account of rLNG sourcing of 0.7mmscmd in June ’09. The company during the quarter has declared a bonus of 1:1 (F.V. Rs2).
In-line with our expectation, GGCL has commenced sourcing of rLNG to the tune of 0.7mmscmd.
We reckon that this could potentially be stepped up to 1mmscmd in H2CY09E, given the benign rLNG environment and robust retail industrial demand.
This should help arrest the volume decline trend which we have witnessed in five of the last six quarters.
Allocation of KG basin (under gas allocation) to the tune of 0.3-0.4mmscmd is a possibility too. Modelling for these scenarios playing out going forward, we factor in volume growth of 20% for CY10E.
We revise our CY09E and CY10E earning upwards by 15% and 5% respectively to factor in a) better than anticipated H1CY09 b) improvement in margins going forward.
Commensurately we are revising our target price from Rs320 to Rs360, implying an upside of 11% from the current levels.
We however downgrade the stock from Buy to HOLD, given limited room for appreciation.
We believe that GGCL is the best bet in the domestic city gas distribution space. Having said that, we would look for lower price points to initiate fresh long positions.