Gujarat Gas - Integration benefits likely to accrue in CY13 - Centrum

Buy
Target Price: Rs326
CMP: Rs290
Upside: 12.5%

Although, Gujarat Gas's sequential performance was muted due to seasonality factor, the YoY performance was boosted due to price hikes effected earlier during the year. The company thus reported PAT of Rs701mn down by 29.5% QoQ while jumping by 275.9% YoY. LNG prices have remained high till date in Q1 which are expected to soften by March. However, the company hiked prices in the industrial segment by about 4% and of CNG by about 8% from February which is likely to benefit the Q1 performance. Open offer by GSPC Distribution Networks Ltd. (GDNL) got over on 12 February 2012. We have rolled over our estimates to CY14E and upgraded the stock to 'Buy' from Neutral.

- Flattish average realisations: GujGas's average distribution realisations remained flattish at Rs28.0/scm during Q4 as it did not hike prices for any of its segments. Distribution volumes however declined by 8.5% QoQ to 2.9mmscmd due to the seasonality factor, high spot LNG prices and relatively better rates for grid power.

- Cost pressure leads to lower EBITDA/scm: Blended gas cost was up 1.4% QoQ at Rs22.4/scm which impacted the gross margin and further EBITDA/ scm which came in at Rs3.9/scm. Spot LNG prices have remained higher during January and February which are expected to soften only in the month of March.

- PAT declines sequentially: Depreciation was up 13.2% QoQ at Rs183m due to capitalisation of pipelines and CNG stations. Other income was at Rs102mn; lower both QoQ and YoY as there was no one-time income during Q4. Lower volumes and higher LNG prices led to 29.5% decline in QoQ PAT at Rs701mn although it was up by a whopping 275.9% YoY (performance in Q4CY11 was affected by higher spot LNG prices).

- Volume growth expected due to integration benefits: GujGas's distribution volumes declined by 7.0% YoY at 1,158mmscm due to rising LNG prices, lower domestic supply and rupee depreciation all of which led to over 38.4% YoY surge in average prices. We believe volume growth to come back due to integration with the acquirer, GSPC Distribution Networks Ltd. (GDNL). Also, we believe that the rupee is likely to appreciate going forward which will further complement the earnings. However, integration benefits will start accruing only after a couple of quarters when the acquisition will be over and the new management settles in. We have revised our CY13E and CY14E estimates with EPS at Rs23.5 and Rs23.7 respectively. We have also rolled over our estimates to CY14E and based on which we have upgraded the stock to 'Buy' from Neutral with a revised price target of Rs341 (earlier Rs326).

Source : Equity Bulls

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