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Spark Capital - Gujarat Gas 1QCY13: Weak volumes and higher gas costs drag earnings; Maintain Reduce




Spark Capital Advisors(India) Private Limited


06 May 2013





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Weak volumes and higher gas costs drag earnings; Maintain Reduce Gujarat Gas (GGAS) reported lower than expected results with EBITDA (28% lower than est) down 34% qoq (down 6% yoy) due to decline in volumes and higher gas costs. Volumes declined by 2% qoq (-13% yoy) to 264mscm, in this seasonally weak quarter. Gross spreads of Rs. 4.5/scm were down 21% qoq as 9% hike in material costs surpassed the benefits of 4% price hike in Industrials (78% of volumes) and 8% in CNG (13% of volumes) taken in Feb’13. Nevertheless, higher other income and lower effective tax rate (due to higher dividend income) reduced the miss at earnings. Earnings of Rs. 593mn declined by 15% qoq and 8% yoy After the open offer, GGAS stock price has been falling steeply (~20% 3M) and now stands below its fair value. While valuations seem to have bottomed out, lack of structural volume growth drivers would inhibit rerating in the stock price. Given the promoter’s (new) track record of prioritising volume growth over margins, we would wait for clarity on business strategy before revisiting our bearish stance. We roll forward our DCF model to Mar’14; change our terminal growth assumption from 2% to nil; and increase our WACC assumption from ~11% to 12% to reflect uncertainty over volume growth. At current valuations (11x PE, 2.7x P/B), risk-reward does not seem to be favourable. Maintain Reduce with TP of Rs. 273 (Rs. 310) Key highlights: Volume growth: Volumes of 264mscm are the lowest seen in the last 15 quarters – down 2% qoq and 13% yoy. Apart from seasonal weakness, industrial customers are shifting to grid power from gas based captive units. However, CNG and Dom/Comm PNG segments continue to witness steady traction. Management targets to revive volumes and register a single digit growth in CY13 based on new customer addition in liquid firing segment, larger CNG conversions and strong growth in domestic PNG volumes – we estimate only 2% volume growth CAGR over CY13E-14E Margins: Gas procurement cost of $12.6/mmbtu ($12.2/mmbtu our estimate) was up 9% qoq on higher RLNG prices against only 4% hike in Industrial prices (Feb’13), which led to a 21% qoq decline in gross spreads. However, the recent (April’13) price hike of 4% in Industrial segments and softening of input (RLNG) prices should support spreads in 2QCY13 Operational update: The Company connected more than 10,800 new residential customers, converted about 6,000 vehicles (5100 in 4QCY12) to CNG and registered >44,000scmd of new volumes in the industrial sector during the quarter

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