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Gujarat Gas (GGAS) - Qtr. Update - Dated - November 13, 2013




Axis Capital Limited


14 Nov 2013





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Gujarat Gas’ (GGAS) PAT at Rs 1.1 bn was higher than our/ Street estimates of Rs 0.8 bn due to highest-ever gross margin of Rs 9.6/scm. Price hikes (Jul ’13) and weak spot LNG prices led to margin beat. Margin unsustainable: In near term, GGAS would continue to earn higher margin as regulator would take time to resolve issues on (a) regulation of marketing margin and (b) tariff notification of extant network. We increase our CY13/14 PAT estimates by 56-66% to factor in higher margin of Rs 7.3/scm (vs. Rs 5.5/scm earlier). However, margin may decline in long-run due to (a) possible cut in tariff by regulator to allow 14% RoCE (vs. 33% currently) and (b) competition could erode marketing margins. Maintain HOLD with TP of Rs 270 (6% downside). At CMP of 289, the stock trades at 10x FY14E EPS of Rs 29 (Rs 19 earlier) and 10x FY15E EPS of Rs 29 (Rs 18 earlier). Increase EPS estimates by 56-64% as higher margin more than offsets lower volumes We increase CY13/ 14E EPS by 56%/ 64% to factor in higher gross margin of Rs 7.3/scm (vs. Rs 5.5/scm earlier). However, continued price hike would impact volumes adversely. Hence we cut CY13/ 14E volume by 12%/ 8% to 2.8/ 2.9 mmscmd. Our TP of Rs 270 (Rs 240 earlier) is based on regulated RoCE of 14% on network assets. Key Assumptions: Crude at US$ 110/ bl for FY14 and US$ 105/ bl for FY15. INR/USD at 62 for FY14 and 64 for FY15. Regards, Amit Mishra, CFA (Sr VP – Energy) Institutional Equity Research Axis Capital Limited Tel: +91 22 4325 1142 Prashant Tarwadi (VP – Energy) Institutional Equity Research Axis Capital Limited Tel: +91 22 4325 1113

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