Thursday, May 3, 2012

> GUJARAT GAS: Q1CY12 Result update

Volume growth to stagnate, cost pressures to continue, regulatory concerns remain; Sell

Although, Gujarat Gas’ (GGAS) Q1CY12 PAT soared significantly on a QoQ basis from Rs247mn to Rs650mn, cost pressures continued to hit the operating performance. We estimated the price hikes exercised during the quarter would aid the company to report a PAT of about Rs950-960mn but higher LNG prices impacted the overall performance. We believe the cost pressure is likely to hamper GGAS’ performance going ahead which will stagnate the volume growth. The company will not be able to pass on the increase in sourcing cost completely to the customers thus hitting the operating margins. Regulatory concerns (as in case of IGL) would also keep the stock price under check. Hence we maintain our negative view on the stock with a ‘Sell’.

  Price hike across segments keep the average realisations up: GGAS’ average distribution rate jumped 15.0% QoQ at Rs23.5/scm from Rs20.4/scm on the back of price hikes taken during the quarter across all the segments. We believe some volume loss also happened due to price hike as the volumes declined by .1% QoQ to 3.3mmscmd from 3.4mmscmd.

  EBITDA/scm at Rs2.2/scm, still lower than average of about Rs3.0/scm: Sequentially, gas sourcing cost jumped by 7.9% to Rs19.6/scm which led to margin contraction. Gas sourcing cost jumped as GGAS’ LNG sourcing has been linked to crude prices and crude prices jumped during the quarter from about US$105/bbl to US$125/bbl thus elevating LNG prices. Higher LNG prices partially nullified the impact of price hikes. EBITDA/scm thus stood at Rs2.2/scm up QoQ from Rs0.7/scm yet lesser than the normalized Rs3.0/scm.

■ One offs keep other income high: Other income for Q1 jumped by a massive 41.0% QoQ and 190.5% YoY at Rs294mn due to one off items (about Rs90-100mn). Higher gas prices along with higher other income led to 163.5% QoQ jump in bottom-line at Rs250mn yet declined by 9.9% YoY.

 No volume growth in near term, margin pressure to continue, regulatory concerns remain, reiterate ‘Sell’: GGAS’ Q1 performance although better sequentially did indicate cost pressures. We believe that the cost pressures are likely to continue owing to high crude prices which will keep up the LNG sourcing costs for GGAS. Volume growth would also be constrained due to higher fuel prices. After IGL’s tariffs, concerns over GGAS’ tariffs have also emanated which will remain till the time tariffs are not notified by the regulator. We believe that there are multiple headwinds for GGAS going ahead like no volume growth, margin pressure and regulatory concerns which will affect the financial performance of the company and even the valuation multiple. We have reduced our volume growth for CY13E and CY14E and revised our estimates. We maintain ‘Sell’ rating on the stock with a price target of Rs284 (earlier Rs302).