Gujarat Gas net profit up 179% despite low volumes
Moneylife Digital Team 22 February 2013

Gujarat Gas (one of our Long Term picks) has posted decent third quarter results despite weak volumes. The stock appeared on the Long Term section in our 8-21 February 2013 issue with an entry price of Rs312.45. The share price is currently Rs289.20 on the BSE.

Net sales of Gujarat Gas for the December 2012 quarter were up 17%, to Rs760.78 crore when compared to Rs649.89 crore in the same quarter previous year. The net profit during the third quarter of the 2013 fiscal was up a whopping 179%, from Rs24.79 crore to Rs69.27 crore. The company managed to put in an impressive performance despite low volumes and high input prices. The total volume of gas sold during the quarter was 270 mmscmd (million metric standard cubic meters per day) compared to 314 mmscmd in the corresponding quarter of the previous year. Volumes in the industrial segment have been lower with increasing price of gas. However, the impact on profits due to increase in gas cost in the previous year was mostly mitigated in 2012.

Gujarat Gas has been quite consistent in its financial performance. Not once did the company’s net sales decline and it has been growing steadily in double-digit figures. Net sales growth (17%) for the 2012 December quarter was below par though, when compared to its three quarter y-o-y growth rate of 26%. The company’s return on net worth is a fantastic 37%. Surprisingly, its valuation remains subdued, with market capitalisation just over 8x operating profit. Perhaps, it is the cyclical nature of the business coupled with regulatory hurdles and unpredictable nature of gas supply which makes the valuation cheap.

Sugata Sircar, managing director, said, “Volumes in certain industrial segments have been impacted by rising cost of gas and resultant increase in gas prices. The cost of re-gasified liquefied natural gas (RLNG) has increased sharply in Q4, 2012, which had a significant impact on our costs, as RLNG constitutes 47% of the sourcing mix.”

Mr Sircar further said, “GGCL has been executing its strategy successfully, of sustaining profitability while investing in growth. The company’s distribution network has been extended by laying 59 km of additional steel pipelines in 2012. Eight new compressed natural gas (CNG) stations were commissioned, about 34,600 residences have been connected and more than 23,400 vehicles converted to CNG during the year. However, more than 250,000 scmd of additional industrial volumes were commissioned during the year and more importantly, in certain viable segments.”

The company connected 7,300 residential customers and converted about 5,100 vehicles to CNG during the quarter in addition to commissioning additional volumes in the industrial sector.

However, Gujarat Gas seemed to have missed analysts’ estimates. According to Nomura Equity Research (Nomura), “Sharp decline in sales volumes was the key reason for earnings miss, in our view”. Nomura had estimated that the company’s bottomline would be Rs85.1 crore, while Bloomberg’s consensus was Rs80.5 crore.

According to Nomura, GGCL has increased gas prices for industrial customers by 4%, and is the first such instance of price increase since July 2012. The company also increased CNG process by 8.5%. This will help the company to maintain margins.

Some of the major events during the quarter were:

  • On 3 October 2012, the company’s majority shareholder, BG Asia Pacific Holdings Pvt Ltd (BGAPH), had reached agreement with GSPC Distribution Networks Limited (GDNL), for sale of its entire shareholding in the company. BGAPH’s shares will be transferred to GDNL after the satisfaction of conditions in the agreement. 
  • The company received authorization from the Petroleum and Natural Gas Regulatory Board for the city gas distribution areas of Surat, Bharuch and Ankleshwar.

Gujarat Gas Company, a subsidiary of BG Group plc (65.12%), currently distributes approximately 3.2 mmscmd of natural gas. GGCL continues to be India’s largest private sector gas distribution company in terms of sales volume. It has proven expertise in distributing gas to the entire range of customers—Industrial, Commercial, Domestic and CNG. GGCL distributes gas to about 375,500 industrial, commercial and domestic customers through its pipeline network and CNG to over 192,100 vehicles through 54 retail outlets.

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Sachin Purohit
1 decade ago
Well, actually poor December 2011 quarter exaggerates the pretty ordinary numbers of December 2012. So the YoY 179% increase in Net Profits is deceptive. If we compare QoQ, the real story emerges.

I too have a long-term position on this company. However, major concern here is not cyclical nature, regulatory hurdles or unpredictable nature of gas supplies. I think the shareholders trust the competency of the management in these regards. Not too long time back, this company was priced at more than Rs. 500 a share with much higher PE rating. The biggest concern is the change of promoters. After the stake sale, a clear picture is yet to emerge regarding the intention of the new promoters. Whether they are planning to merge it into GSPC or delist this company by buying out other shareholders' stake at pittance. I wish this article could have shed some light on these issues. The undervaluation reflects these concerns.
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