Gujarat Gas - Motilal Oswal

Gujarat Gas (City Gas Distribution player) (GGAS IN, M Cap: US$1.1b, CMP: Rs406, Not Rated)

- Volume and earnings growth: Gujarat Gas expects total volumes to go up by at least 0.5mmscmd per year over the next 2-3 years (contingent on gas availability) and addition of 25,000-30,000 PNG connections every year. ~85% of its current customers are industrial consumers that have stable demand. The company eyes CNG volume growth of 15% over the next 2-3 years. In August 2010, it hiked its CNG prices by 8% and did not rule out increase in other segments if the prices of alternative fuels (naphtha, fuel oil) remain high.

- Gas sourcing remains a key challenge: At present, RLNG constitutes 1.8mmscmd of its supplies; of this, 1.2mmscmd is to meet the shortfall due to short-term non-availability of PMT gas. The management is working towards long-term LNG contracting and expects to execute this by December 2010.

- Network growth plans: Currently, it has 33 CNG stations and more than 875 industrial customers. It plans to spend Rs1.5b-2b per year over the next 2-3 years to expand its network and will be funding it through internal accruals as well as term loans.

- To bid for CGD in new cities: Gujarat Gas plans to bid for at least four more cities in Gujarat.

- New demand avenues: The company's current network has potential unmet demand of 0.6-1mmscmd from industrial entities if continuous supply is assured. To meet this demand, Gujarat Gas intends to tie-up RLNG supplies soon. The company sees long-term growth coming from CHP (combined heat and power) generators and applications like water geysers. It also co-promotes use of CNG kit, geysers, power generators, etc, but does not have a revenue objective for this promotion. Other demand drivers would be 'green' push from the government to industrial units to convert to natural gas (Based on MoEF's direction, 65-70 industrial customers in the Bharuch-Ankleshwar region have signed up for 0.6-0.7mmscmd).

- Awaiting network authorization: The company has applied to PNGRB for authorization of its CGD networks and expects the authorization in the next couple of months. Post authorization, it will have marketing exclusivity for three years and thereafter the network will be open for any third party to market its gas. However, Gujarat Gas believes such a situation will not arise because globally or domestically, there are hardly any precedents where a third-party marketer enters and captures significant market share from the incumbent. Switch by customers, post exclusivity is likely to be limited to 10% or so.

- Triggers: (1) Long-term RLNG source tie-up, (2) Winning of new cities, and (3) Allocation of KG-D6 gas.

Valuation and view: The stock trades at 22x CY10E EPS of Rs19. Not Rated.

Source : Equity Bulls

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