Gujarat Gas - 16% potential upside; upgrade to Buy - BRICS

Gujarat Gas' Q1CY12 net profit fell 10% yoy to Rs.650 mn (we expected Rs.680 mn) due to a 16% fall in gross margins to Rs.3.9/scm (we expected Rs.4.5/scm) and a 1% decline in sales volume to 3.34 mmscmd (in-line). We have lowered our CY12 and 13 EPS estimates by 21% and 12% on lower volume and gross margin. Our DCF-based target increased by 1% to Rs.378 based on change in our assumptions and rollover to Q1CY13 estimates. We upgrade the stock to BUY based with a 16% upside to our target.

Gross margin down on partial pass throug of prices, may improve

Operating Profits were down 30% yoy to Rs.765 mn (we expected Rs.1 bn) largely due to lower gross margin as a result of incomplete pass through of higher natural gas prices. However, net profits were closer to our estimates due to a 190% increase in other income to Rs.294 mn (we estimated Rs.100 mn) due to a one-time reversal in provisions. Gross margins are likely to improve as GGAS has taken a 7% price increase for industrial customers in April 2012.

Lower Volume, EPS estimates on higher RLNG prices

We are lowering our CY12 and CY13 volume assumption by 6.4% and 4.8% to 3.4 mmscmd and 4 mmscmd given the increase in crude-linked contract LNG prices to around US$14-15/mmBtu - a level that is likely to slow the uptake of gas. We also lower our gross margin for CY12 and CY13 to Rs.4.3/scm and our EPS by 21% to Rs.20.2 and 12% to Rs.23.8 respectively.

Upgrade to Buy based on 16% upside

We raise our DCF based target by 1% to Rs.378 on changes in assumptions and rollover to Q1CY13 estimates. The company is less vulnerable to regulatory shocks given its customer and supplier mix. We are positive on GGAS' long-term prospects based on its sound business model and proactive management. The stock trades at 16x CY12 and 14x CY13 earnings. With a potential 16% upside to our DCF-based target, we upgrade to BUY.

Source : Equity Bulls

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