Gujarat Gas - Higher Gas Cost Reduces Volume Off-take - Karvy

Gujarat Gas has been reporting dip in the volumes since last couple of quarters. The growth rate has come down from 12% to -13%% in last 10 quarters. This could be attributed to lower demand from the industrial segments due to higher cost of natural gas. The cost has doubled in last 2 years. We expect margins to make up for lower volume growth to a certain extent. However we don't see notable earning upsides.

Volumes continue to be under pressure

With a significant reduction in domestic supply, higher component of LNG in volumes sold to SMEs has increased the variable cost by 25% YoY followed by an increase in selling price by 23%. The average realization of gas in 1QCY13 is Rs. 28.9/scm as against Rs. 23.5/scm in the corresponding quarter last year. Apart from increasing component of LNG in sourcing portfolio, the LNG prices have also increased. This has resulted in significant reduction in the offtake of natural gas by the SMEs due to affordability issues. Management states that the volumes in the industrial segment have been undergoing a churn with increasing price of gas.

Margins unable to make up for fall in volumes

The margins have come down sequentially by Rs. 1.2 / scm as higher LNG cost restricted their pass through ability. Although they managed to realize margins higher then Rs 5/scm in CY12 their earnings have barely managed a 5% growth annually. Although margins are expected to continue strong, volumes are likely to play spoilsport.

Valuation & Outlook

We expect the volumes to be under pressure until LNG prices correct and stabilize at $10/mmbtu, which seems to be very unlikely in the medium term. We upgrade our rating to HOLD on the stock with a target price of Rs 240 at 12x CY14. Any favorable judgment from Supreme Court IGL-PNGRB case could be an opportunity to exit the stock at a higher price.

Source : Equity Bulls

Keywords