Gujarat Gas (GGCL) Q1CY09 results were in line with our expectations. While revenues contracted by 7% q-o-q, from Rs3.3 billion in Q4CY08 to Rs3.1 billion in Q1CY09, net profits grew by 14% over the same period.
Reduced cost pressures, driven by lower employee and other expenses, assisted in a 400bps operating margin expansion on a sequential basis.
Distributed volumes were lower q-o-q, on account of supply disruption from the PMT fields during the quarter.
In Feb’09, the company brought about a 15% increase in gas prices to offset higher gas costs (+24% y-o-y) caused by a 24% rupee depreciation in CY08.
rLNG prices have come down from the highs of $20/mmbtu to $6/mmbtu currently, as global economic headwinds subdue demand.
Competitive rLNG prices mean that GGCL could potentially increase its distributed volumes by sourcing gas from this segment, a near impossibility historically.
We see this as a window of opportunity for the company to address growth concerns, and, hence, expect sourcing of rLNG of 0.4-0.5mmscmd from H2CY09E.
Allocation of KG basin (under gas allocation policy) of 0.3-0.4mmscmd is a possibility. Modelling for playing out of both these scenarios, going forward, we factor in a volume growth of 19% for CY10E.
While introducing numbers for CY10E, we trim our 12-month target price to Rs320 (v/s Rs340 earlier).
This reduction primarily stems from a) change in our INR/USD assumption from Rs45 in CY09E to Rs52 and Rs48 in CY09E and CY10E respectively b) lower CY09E volumes of 1092mmscm, from 1300mmscm earlier.
We maintain our BUY recommendation on the stock.