The March quarter numbers of Gujarat Gas Co. Ltd were better than our expectation on the profit front, which increased by 69.5% year-on-year (y-o-y) to Rs62 crore against our expectation of Rs50 crore. The company’s gross gas spread touched an all-time high of Rs4.30 per standard cubic metre (scm) during the quarter against Rs4 per scm registered in the last quarter of 2009.
Also See Ballooning High (Graphic)
Volume growth came on the back of higher gas supply from indigenous sources (additional Panna-Mukta-Tapti and Cairn India Ltd volumes) and regassified liquefied natural gas (RLNG) volume (around 10% of total gas sourced) flow during the quarter. At the current price, the stock is trading at 16.6 times its 2010 estimates and 13.8 times its estimated 2011 earnings. We recommend an accumulate on the stock, with a target price of Rs306.
For the first quarter of 2010, Gujarat Gas reported revenue growth of 33.8% y-o-y to Rs410 crore against our expectation of Rs397 crore. Revenue was driven by improvement in average realizations and volumes. Average realizations increased to Rs13.80 per scm against our expectation of Rs13.90 per scm. Average realizations were higher owing to the price hikes implemented by the company in February and May 2009 to cover the effect of the depreciation in rupee on gas cost and compressed natural gas (CNG) price hike effected on 20 December, which helped earn higher CNG realizations during the quarter. Sequentially, realizations remained flat at Rs13.80 per scm as the full effect of the CNG price hike effected on December 20 was offset by lower RLNG volumes (wherein the company earns higher realizations on account of pass through) in the quarter under review.
Sequentially, the company’s operating profit margin (OPM) expanded by 510 basis points (bps) to 25% mainly on account of increase in the gross gas spread (selling price minus the gas cost). This was on account of the full effect of the CNG price hike effected in the latter part of December and 1.6% rupee appreciation on a sequential basis, which lowered gas cost. On a y-o-y basis, the company’s OPM expanded by 672 bps to 25% as the gross gas spread increased 27.7% y-o-y to Rs4.30 per scm. Higher gross gas spread y-o-y was on account of higher realizations and positive effect of stronger rupee on gas cost in the first quarter of 2010.
OPM was also supported by the 3% y-o-y decline in operating expenditure during the quarter, wherein staff costs increased 8.3% y-o-y to Rs10.7 crore and other operating expenditure fell 8.3% y-o-y to Rs19.3 crore. Robust expansion in OPM y-o-y resulted in earnings before interest, tax, depreciation and amortization, increasing by 83.1% y-o-y to Rs103 crore, which was higher than our expectation of Rs83 crore.
Gujarat Gas volumes during the quarter was supported by higher gas flow from indigenous sources, unlike in previous quarters when the company relied mostly on RLNG to support volume growth. Thus, on account of higher indigenous volume flow, RLNG volume was lower sequentially. We expect RLNG prices to remain subdued owing to which, we expect RLNG volume flow to be robust in the ensuing quarters. The company is expecting Krishna-Godavari D6 (KG D6) gas to flow from May-end. Thus, sustainability of increase in domestic volumes, RLNG volumes and gas flow from KG D6 would be the future growth drivers for the company and soften supply-side constraints.
With incremental volumes likely to flow to the high-margin industrial retail segment, the company would register expansion in margins going ahead. Also, potential appreciation of the rupee would be the icing on the cake. We value the company at Rs306, which translates into 15 times its estimated 2011 earnings per share of Rs20.40, implying an upside of 8.6% from the current level.
Graphic by Yogesh Kumar/Mint