Gas distributor Gujarat Gas Co. Ltd delivered impressive results for the quarter ended 30 June. Not surprisingly, the stock has risen 10% to Rs 446 since the numbers were announced last week. During the same period, the benchmark Sensex has declined 2%.
What boosted its financial performance? One reason would be the improvement in realizations, thanks to price increases. The firm has raised prices 24% for industrial customers since 1 April, and a 4% hike in the compressed natural gas segment towards May-end. As a result, average price realizations improved 11% from the preceding quarter to Rs 19.10 per standard cubic metre (scm). However, volumes have remained more or less flat at 302 million standard cu. m (mscm). Revenue increased 11% over the March quarter to Rs 577 crore.
Gujarat Gas’ gross spreads improved sharply by 26% to Rs 5.90 per scm, as higher realizations were not matched by a proportionate increase in gas sourcing costs. The company’s operating profit margin, thus, increased by 343 basis points on a sequential basis to 24%. One basis point is one-hundredth of a percentage point. Operating margin is higher when compared with the same period last year as well.
While the firm has delivered good spreads and a strong operating performance, it’s unlikely this will be sustained going ahead. That’s purely because of the increasing trend in gas cost on account of higher cost and proportion of regasified liquefied natural gas (RLNG) in Gujarat Gas’ total gas sourcing portfolio. The firm maintains that this trend “is forecast to be a continuing feature in the company’s gas sourcing mix”.
That means investors can expect some moderation in spreads. In June quarter, operating profit increased 29% sequentially to Rs 140 crore and net profit increased 33.5% to Rs 96 crore.
Since the beginning of this calendar year, the Gujarat Gas stock has outperformed the BSE-500 Index of BSE. Many analysts have increased the earnings estimates for the year after the June quarter numbers. While the firm has shown good pricing power, some analysts believe it will be difficult to frequently pass on higher RLNG prices. The sharp spike in stock price could mean most of the positives seem to be factored in the price and near-term appreciation looks limited.