Gujarat Gas - Gross Margin Surpasses Expectation - BRICS

GGAS' net profit at Rs995mn for Q3CY12 surpassed our estimate of Rs698mn, due to expansion of 29% yoy in gross margin to Rs6.1/scm (vs. estimate of Rs4.9/scm), in spite of a decline of 10% yoy in volume to 3.2mmscmd (vs. estimate of 3.3mmscmd). We raise our CY12 gross margin estimate by 14%, on account of the higher than expected gross margin in Q3CY12, but lower our volume estimates for CY12 and CY13 by 3.3%. Our DCF-based target price is up by 2% to Rs395 due to the change in assumptions and rollover to Q3CY13 estimates. We maintain BUY.

Profit rises by 24% yoy, gross margin up 29% yoy

GGAS' net profit grew 24% yoy to Rs995mn, as against our expectation of Rs698mn, on account of an improvement of 29% yoy in gross margin to Rs6.1/scm, due to favourable fluctuations in RLNG prices. GGAS had taken a price hike (averaging 8.6% across its customer base) in July 2012, in anticipation of higher RLNG prices. Sales volume declined 10% yoy to 3.2mmscmd (vs. estimate of 3.3mmscmd). Other income increased 72% yoy to Rs193mn.

Raising CY12 gross margin estimate by 14%, lowering CY12-13 volume estimate by 3%

We raise our CY12 gross margin estimate by 14% to Rs4.9/scm from Rs4.3/scm, to factor in the higher-than-expected gross margin in Q3CY12. As per management, GGAS' volume growth will be lower, due to reduced demand from industrial consumers. Hence, we lower our volume estimates for CY12 and CY13 by 3.3% and 2.7% to 3.3 mmscmd and 3.4mmscmd, respectively. As a result of these changes in assumptions, our CY12 EPS estimate is now up by 13.9% to Rs22.8, while our CY13 EPS estimate is down by 3% to Rs24.3.

Raising target price by 2% to Rs395 (32% upside). Maintain Buy.

We raise our DCF-based target price by 2% to Rs395, due to a change in our estimates and rollover to Q3CY13 estimates. The stock's current price implies a post open-offer price of Rs280/share at 75% acceptance ratio, which will be the case if all the non-promoter shareholders tender all their shares. We believe that a change in promoter will not be a very huge negative for GGAS, as GSPC can ensure regular gas supply. Furthermore, since GSPC charges market based prices in its areas of operation, the fears of a contraction in gross margin may be unfounded. The stock trades at 13.1x CY12 and 12.3x CY13 earnings and at a 32% upside to our target price of Rs395. Maintain Buy.

Source : Equity Bulls

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