>GUJARAT GAS (CITI)

Buy: Strong 2Q; Spot LNG Improves Volumes

■ 2Q above estimates — GGas reported 2QCY09 PAT of Rs474m, up 8% yoy and 30% qoq, ahead of our estimates. This was mainly due to better realisations driving higher gas margins, which led to a yoy EBITDA expansion of ~400bps.

■ PMT impacts gas volumes, partly offset by LNG — GGas distributed 2.7mmscmd of gas volumes in the quarter, 6% down qoq. This was mainly on account of a shortfall in supply from PMT. To partly overcome this shortfall the company procured 0.7mmscmd spot LNG in June, which was supplied mainly to the industrial retail sector.

■ KG becomes less critical as spot LNG commences — The EGoM has allocated 5 mmscmd of KG gas for city gas. While GGas appears to be a contender for a portion of this, uncertainty prevails given the controversy surrounding eligibility (only for domestic/CNG as per the Ministry but also including industrial as per the PNGRB – pertinently, c.72% of GGas’ sales are to industrial retail customers). To make up for this, GGas commenced procurement of R-LNG in the quarter. With spot LNG prices continuing to remain weak, this should serve as a good supply source to boost volumes in the near-term.

■ Announces bonus; maintain Buy (1L) — GGas has announced a 1:1 bonus and is our preferred pick amongst city gas distributors given its robust business model (less reliance on APM gas), lower regulatory risk (given reasonable operating margins), leverage to KG gas, and growth opportunities within Gujarat. We maintain our Buy rating with a target price of Rs386. Our CY09- 11E earnings have been increased 9-10% on the back of better realisations.

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