Gujarat Gas Coompany - High RLNG prices dent gross margin; maintain Buy - BRICS

GGAS' net profit declined 9% yoy to Rs593mn, as against our estimate of Rs800mn, due to lower than expected gross margin, inspite of sales volume falling largely in line with expectation. Gross margin was up 15% yoy, but down 21% qoq to Rs4.5/scm, while sales volume declined 14% yoy to 2.87mmscmd (vs. our estimate of 2.9mmscmd). We are lowering our CY13 gross margin estimate by 4% to Rs4.8/scm to factor in the lower-than-expected gross margin in Q1CY13. We are also lowering our volume estimates for CY13 and CY14 by 5.6% and 6.2%. Our DCF-based target price is now down by13% to Rs320, due to the change in our estimates, lower than expected cash on GGAS' balance sheet and rollover to Q1CY14 estimates. Maintain BUY.

Profit down 9%, volume down 14%, gross margin up 15% GGAS' net profit declined 9% yoy to Rs593mn, as against our estimate of Rs800mn, due to lower than expected gross margin. Gross margin was up 15% yoy, but down 21% qoq to Rs4.5/scm (vs. our expectation of Rs6.2/scm), due to a sharp fall in domestic gas supply, which was substituted by high priced RLNG. GGAS hiked prices for its PNG, CNG and industrial customers during the quarter. Sales volume declined 14% yoy to 2.87 mmscmd (in line with our estimate of 2.9 mmscmd). Other income fell 12% yoy to Rs259mn.

2013Lowering CY13 gross margin estimate by 4%, CY13-14 volume estimate by 6% We are lowering our CY13 gross margin estimate by 4% to Rs4.8/scm from Rs5/scm, to factor in the lower-than-expected gross margin in Q1CY13. As per management, the company has been witnessing a churn in volumes of the industrial segment due to the increase in gas prices. Hence, we are lowering our volume estimates for CY13 and CY14 by 5.6% and 6.2% to 3mmscmd and 3.3mmscmd, respectively. As a result of the changes in our assumptions, our CY13 and CY14 EPS estimates are down by 12.9% and 9.4% to Rs20.2 and Rs23.2, respectively.

Lowering target price by 13% to Rs320 (31% upside). Maintain Buy. We are lowering our DCF-based target price by 13% to Rs320, due to the change in our estimates, lower than expected net cash amounting to Rs420mn (vs. our estimate of Rs3bn) on the company's balance sheet and rollover to Q1CY14 estimates. The company is less vulnerable to regulatory shocks, given its customer and supplier mix. We believe that a change in promoter will not be negative for GGAS, as GSPC canensure regular gas supply. We are positive on GGAS' long term prospects, considering its sound business model. The stock trades at 12.2xCY13 and 10.6xCY14 earnings, with potential for an upside of 31% to our DCF-based target price. Maintain BUY.

Source : Equity Bulls

Keywords