Gujarat Gas - Margins expand; outlook improves - Centrum

Price hikes across segments during the beginning of Q3 led to Gujarat Gas's stupendous performance with 16.2% YoY and 79.6% QoQ jump in adjusted PAT (adjusted for other income) at Rs935mn (reported PAT at Rs1,001mn). Although LNG prices softened on a sequential basis, ~2% QoQ rupee depreciation led to flattish gas sourcing cost. Going ahead the company is likely benefit from both rupee appreciation and lower LNG prices. We thus expect an improvement in operational performance in Q4 and in CY13E. However, the near term stock performance is likely to follow the open offer price (at Rs314.2/share). Based on our revised estimates we upgrade the stock to 'Neutral' from Sell.

Price hike at the beginning of Q3 leads to higher average realisations: GujGas's average distribution realisations grew by 42.6% YoY and 6.2% QoQ to Rs28.1/scm owing to the price hikes across segments at the beginning of the quarter. Distribution volumes that were marginally up QoQ at 3.2mmscmd, were however down 9.5% YoY primarily due to YoY increase in retail prices by a whopping 30-40%.

Gross margins, EBITDA/scm expands: Price hikes across segments without any increase in sourcing cost led to expansion in gross margin from Rs4.6/scm in Q2 to Rs6.1/scm in Q3 and EBITDA/scm from Rs2.7/scm to Rs4.4/scm in Q3. Spot LNG prices have been softening and hence the sourcing cost was contained despite ~2% average rupee depreciation sequentially. Thus average natural gas sourcing cost remained flattish at Rs22.0/scm while jumping by over 46.7% YoY from Rs15.0/scm.

One time other income further benefits bottom-line: Depreciation for Q3 was at Rs161m; however, other income jumped to Rs193mn. The company had one time income of Rs90mn from the sale of assets which led to higher other income. Thus, GujGas reported that PAT soared to Rs1,001mn up 23.7% YoY and 90.5% QoQ. Adjusting for one time other income the adjusted PAT jumped by 16.2% YoY and 79.6% QoQ at Rs935mn.

Volumes to remain flattish for the time being: GujGas has been rationalizing its customer portfolio, replacing solid fuel customers with liquid fuel ones. Thus volume growth has been flattish over the past couple of years. However, incrementally the growth is likely to be driven by lower LNG prices and rupee depreciation (our rupee dollar exchange rate estimate for CY13E is Rs48.8/US$). We believe the quarterly price hike cycle is over for the time being and hence customer attrition is likely to be minimal going ahead. Although we do not foresee significant volume growth for the next couple of quarters, we believe the company will be able to maintain its margin performance. Thus, we have raised our earnings estimates for CY13E and CY14E by about 7%. However, near term stock performance will be governed by GSPC's open offer. Based on our revised estimates, we have upgraded the stock to 'Neutral' from Sell with a revised price target of Rs326 (Rs305 earlier).

Source : Equity Bulls

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