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Gujarat Gas - Express Idea

Over the past couple of years Gujarat Gas has seen a steep decline in its gas volumes owing to slowdown in industrial activity and sharp jump in RLNG prices.

March 19, 2014 5:25 IST | India Infoline News Service
CMP Rs241, Target Rs265, Upside 10%

Gas volumes to rise after a hiatus

Over the past couple of years Gujarat Gas has seen a steep decline in its gas volumes owing to slowdown in industrial activity and sharp jump in RLNG prices. The trend is expected to reverse with the company expanding into new territories which encompass large industrial belts. Also, industrial activity is expected to pick up gradually once political stability is attained at the central level. Availability of cheap gas from nominated fields of ONGC and Oil India has enabled Gujarat Gas to bring down CNG prices which will spur up demand for CNG. Cumulatively we expect these factors to result in 8-10% volume CAGR for Gujarat Gas over the next couple of years.


Margins to stay strong

In the period of declining volumes, Gujarat Gas saw a material change in two aspects which will be margin accretive 1) change in mix with regards to segments (power generation, process heat and combined heat & power) whereby better margin process heat contribution has increased to 80% from 35% in CY10, and 2) amongst process segment, demand from industries focusing on quality of heat has increased substantially. Network sharing and gas swapping with GSPC can only improve margins further. Retaining these benefits would cause a sharp jump in margins. However, we expect the company to pass on partial benefits with a view to increase its volumes. Even if the gas prices are raised from April 2014, Gujarat Gas will be relatively less impacted as domestic APM gas accounts only for 15% of its supply.


Decent earnings growth, compelling valuations, strong dividends

During CY13, Gujarat Gas reported revenue growth of just 1% but registered a PAT growth of 29%. This was on the back of benefits of price hike and efficient sourcing of gas. Return to volume growth trajectory, sustained robust margins and limited requirement of capex is expected to result in decent earnings CAGR of 10% during FY14E-16E. With strong cash flows, we expect generous dividend payouts to continue. At current price and projected payout of 50-60% the stock provides an attractive dividend yield of 7%+. In terms of P/E multiples, the stock is attractive both on absolute (FY16E P/E of 7x) and relative basis (IGL FY16E P/E of 8.4x). We recommend BUY.


Financial summary
Y/e 31 Mar (Rs m)
CY12
FY14E
FY15E
FY16E
Revenues
30,960
39,467
36,065
41,166
yoy growth (%)*
28.0
2.0
14.2
14.1
Operating profit
4,082
6,933
6,063
6,874
OPM (%)
13.2
17.6
16.8
16.7
Reported PAT
2,866
4,706
4,079
4,629
yoy growth (%)*
4.8
31.4
8.3
13.5
EPS (Rs)
22.3
29.4
31.8
36.1
P/E (x)*
10.8
8.2
7.6
6.7
Price/Book (x)
3.2
2.6
2.2
1.9
EV/EBITDA (x)*
8.1
5.8
5.1
4.4
Debt/Equity (x)
0.3
0.2
0.2
0.2
RoE (%)*
32.7
34.8
31.3
30.4
RoCE (%)*
33.2
47.0
35.6
35.7
Source: Company, India Infoline Research, * FY14 being a 15 month period, ratios have been annualized



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