High prices continue to impact Gujarat Gas Company

Volumes in certain industrial segments have been impacted by rising cost of gas
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First Published: Sun, Feb 24 2013. 03 48 PM IST
Volumes may remain subdued till softening international prices translate into cheaper gas prices for domestic consumers.
Volumes may remain subdued till softening international prices translate into cheaper gas prices for domestic consumers.
Updated: Sun, Feb 24 2013. 11 22 PM IST
Unavailability of domestic gas and high import gas prices have adversely impacted gas distribution and transmission companies. Volumes at Gujarat Gas Co. Ltd, which supplies gas to industrial and domestic consumers, contracted 8.5% on a sequential basis to 270 million metric standard cubic metre (mmscm) in the December quarter.
Sugata Sircar, managing director of Gujarat Gas, said in a statement: “Volumes in certain industrial segments have been impacted by rising cost of gas and resultant increase in gas prices.” With the company not able to fully pass on the rise in costs, realizations per standard cubic metre (SCM) of gas stagnated Rs.28.
Raw material costs as a percentage of sales inched up from 78.4% in July-September to 79.8% in December quarter. As weak demand forced the company to absorb some rise in input costs, operating profits on a sequential scale fell 20% to Rs.108 crore. While profits fell by almost 30%, the stock has been under-performing the broader market for some time now.
Compared with a flat mid-cap index on BSE, Gujarat Gas stock lost more than a quarter of its value in the past one year. Apart from regulatory issues, investors are concerned about stagnant volumes and the potential impact of the ownership change. Volumes may remain subdued till softening international prices translate into cheaper gas prices for domestic consumers.
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Another issue weighing on investor sentiment is the change in ownership. Last year, Gujarat State Petroleum Corp. (GSPC) agreed to acquire BG Group Plc’s 65% stake in Gujarat Gas for Rs.2,464 crore. With GSPC being a state-owned company, analysts fear the company may have limited freedom in regularly passing on the rise in input costs to the consumers.
Chirag Dhaifule, research analyst at LKP Securities Ltd, says, “Now that the government company is acquiring majority stake, Gujarat Gas may find it difficult in future to pass on higher gas costs, thus affecting its margins.” Meanwhile, Business Standard newspaper on 17 February reported that GSPC is looking to merge its city gas distribution firm with Gujarat Gas.
With both the firms in the city gas distribution business, the merged entity can derive synergies in the gas procurement and distribution network. While benefits would trickle down in the long-run, GSPC is reportedly looking to transfer the loans it took to acquire Gujarat Gas to the listed entity. That would sharply increase debts on the Gujarat Gas books. Till now Gujarat Gas has been spending negligible amounts on interest costs. A spike in interest costs could weigh on the company’s profits.
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First Published: Sun, Feb 24 2013. 03 48 PM IST
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