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From: The Sharekhan Research Team [mailto:marketwatch
Sent: 10 August 2007 15:07
To: The Sharekhan Research Team
Subject: Sharekhan Post-Market Report dated August 10, 2007
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Gujarat Gas Company
A good bet on Indian gas sector growth
This British Gas subsidiary which is witnessing significant improvement in margins due to increased contribution from retail segment and rupee appreciation is set to witness 50% jump in assured gas supply from September 2007
| Buy | Gujarat Gas Company |
| BSE Code | 523477 |
| NSE Code | GUJRATGAS |
| Bloomberg | GGAS@IN |
| Reuter | GGAS.BO |
| 52-week High/Low | Rs 317/194 |
| Current Price | Rs 277 (as on 10/08/07) |
A 65.12% subsidiary of MNC energy giant British Gas (BG), Gujarat Gas Company (GGCL) is India’s largest private gas distribution company. GGCL operates in India’s second most industrialized state Gujarat, which is also India’s largest gas consumer. The Hazira landfall point in Gujarat accounts for 60% of the total gas in the country. A strong State Government support for a gas-based economy has made Gujarat a pioneer in gas distribution and transmission infrastructure. GGCL operates in the Ahmedabad-Vapi golden corridor, which provides its major industrial retail market to the company.
In year ended Dec. 2006, the company distributed close to 3.1 million standard cubic metre of gas per day (mscm/day) to more than 2,00,000 industrial, commercial and domestic customers and more than 50,000 CNG customers through approximately 2100 km of pipeline network.
GGCL buys natural gas from multiple suppliers like Cairn, GAIL, GSPCL, Niko, PMT and Petronet and distributes gas in Surat, Bharuch, Ankleshwar and has recently started its operations in Vapi, Jhagadia and Kim-Karanj areas.
BG, the parent company is one of the world’s fastest growing oil and gas companies, with a turnover of US $ 9 billion, and operating profit of US $ 4 Billion. BG has shortlisted India as one of the six core countries out of the 20 countries that it operates in and plans to aggressively grow its India-specific portfolio. The group has so far invested more than US $ 900 M and plans to double its investments in next three years.
Natural gas scenario in India
The gas supply situation in the country is currently constrained; however, it would become well balanced after commencement of the east-coast supply. Natural Gas share in the energy basket is expected to flare up to 23% by 2032, from the current 9%, which implies a double-digit growth for the next 25 years. Natural gas is 40% cheaper, compared to fuel oil. Although Coal as an energy source is cheaper, greater focus on environmental issues will compel conversion to cleaner fuels.
India’s natural gas supply will expand exponentially in next five years. Recent gas discoveries in Krishna Godavari (KG) basis by Reliance and GSPC and the two LNG projects by Petronet will increase the supply from an estimated 94 mscm /day to 181 mscm/ day by 2011. Moreover British Gas (the parent company) has a 30% stake in Panna Mukta Tapti (PMT)-one of the biggest gas finds in the country.
Loss of Transmission revenue, unavailability of firm gas supply, hit the margins in the past
GGCL had transmission revenues coming from Gujarat State Petroleum ltd for using the infrastructure built by GGCL. This high margin revenue, which stood at Rs 47.80 crore in 2003, fell to Rs 11.40 crore in 2006 and will be almost nil going forward.
Further the company’s gas supply was uncertain and had to rely on various occasions on spot gas for ensuring its supply. Spot gas prices are generally high and leaves limited profit margin. All these were responsible for a dip in the operating margin of the company. The OPM fell by 120 basis points to 19.2% in 2005 and 310 basis points to 16.1% in 2006.
Already tied up supply of additional 1.65 mscm/day of gas from Sep’07
Over the years, the company focused on tying-up firm availability of gas supply. It entered into contracts with Cairn India, NIKO, R-LNG, PMT, Shell and GSPC for firm supply of gas.
The volume of gas available improved from 2.3 mscmd in Jan’05 to around 3.1 mscmd in Jan’06 and further to around 3.8 mscmd in Jan’07. Further unlike in the past, the company has entered into firm price gas supply contracts, which assures guaranteed supply, provided the supplier is able to explore the gas from the gas fields. However in June’07 one contract of GSPC for the supply of 0.45 mscum per day ended. Further Cairn, which supplies from CB-OS2 basin, is not able to fully meet its supply commitment and hence there is shortfall in supply. So currently the volume of the firm supply of gas stands at 3.08 mscm/day. The company continues to buy from spot market to meet customer requirements.
On the positive side, additional gas of 1.65 mscm per day will come from Sep’07 onwards from PMT basin for which the company has already entered into an agreement. This will be a major boost to its December 2007 quarter. So for the next calendar year 2008, the company will have an assured volume of atleast 4.45 mscm/day. The company has already created a strong retail and industrial clientele base to sell the additional firm supply of gas. If at all there is any excess availability, the company will sell it to its bulk customers, till the retail base in ramped up further.
The company also has tied up with Cairn Energy’s new Ambe field, which will be available from early 2009. As of now, the volume of gas present in the Ambe field is not determined. But the company has signed a contract with Cairn, to get the first right on one-third of the total gas production from the Ambe field.
The company is in talks with one supplier for a very large supply of gas. The company is also in talks with suppliers from KG Basin so as to ensure future growth in volume. Also, additional gas supplies are expected to accrue from PMT fields where production will be increased by 6 mscm / day in future and where in British Gas has 30% stake. These tie-ups when finalized will substantially improve the visibility for the next couple of years.
Focus on retail gas distribution increases margin
The management has outlined its strategy, for moving up the value chain, through three key areas, viz. the Industrial retail market, developing the CNG market, and developing newer applications.
Slowly, with strong distribution and marketing network, the company focused on retail customers who give them low volume, but better margin. The transition period, where the high margin transmission income came down and bulk gas sales increased is now over and now the company is able to get its marketing and distribution network advantage in its retail focus. Its retail volume in 2006 grew by more than 28% to more than 2 mscmd.
GGCL is focusing on retail distribution, which comprises nearly 75% of its revenues, of which the industrial retail market makes up nearly 65% of total sales, while domestic household customers and CNG contribute nearly 5% each. GGCL does not intend to focus on the bulk sales any more, since the retail growth is sufficient to take care of the new volume growth of gas supply.
Focus on CNG will also add to the margins in long run
GGCL is developing the highly remunerative retail CNG distribution business and promoting gas-based usage in a big way.
Currently the company supplies only 195 thousand scm/day of gas in volume for CNG segment which going forward will improve dramatically. The company has about 46000 customers in CNG segment. The government of Gujarat has enacted the Gujarat Motor Vehicle (Use of Fuel) Regulation Act, 2004. The Act provides impetus to use of CNG. The total number of CNG stations for the company as on date stands at 20.
GSRTC is soon expected to convert all the state road transport in Surat to CNG. Nearly 785 buses are operating in Surat with 250 Private buses currently running. The amount of CNG used by a bus is equal to nearly 20 cars in volume. With Surat among one of the 11 most polluted cities in India, this move will aid in reduction of air pollution and further add to sales of CNG gas.
GGCL is investing to increase its presence in newer locations within Gujarat and ensure supply security before entering them
The company has made significant investments over the years in strengthening its infrastructure in its key areas of Surat, Ankleshwar, Ahmedabad and Bharuch. Last year in 2006, the company incurred a capex of Rs 135 crore.
Combined Heat and Power (CHP) process business is growing strong
The company is adopting new areas for using gas, like CHP business, wherein it seeks to optimize energy-recovery from used fuel through combined generation of power and process heat. This augments thermal efficiency to as high as 85% as compared to 55% for combined cycle power plants, and 35% for normal power plants. The CHP system can be used for substituting liquid fuel-based captive power plants in existing markets.
During 2006, the company generated 211 MW of captive power from this system, as compared to 101 MW in 2005. The CHP business has been the key growth driver for industrial retail sales and now accounts for 37% of the total industrial retail volume as compared to 28% in 2005.
COGEN Business also likely to be an important growth area
COGEN is similar to CHP, the only difference being the non-requirement of the customer (the user company) to own the power plant or any asset, with the producer company’s commitment of an assured power supply to the end user at a lower cost, compared to the Grid. The COGEN business, established by the BG group, has been transferred to GGCL, wherein it would target customers with power requirement of 1-5 MW. A similar business has been running in Brazil, and assessing from its success, the company aims to contract 20 MW contracts every year.
GGCL sees the CHP and COGEN businesses as primary vehicles to increase gas volumes and as a low cost entry into the power sector, and it forecasts a huge potential for these segments.
Entering new cities
The company is now building up infrastructure in Jagadia and Vapi in aggressive manner. Both Vapi and Jagadia, being the hub of manufacturing companies, gas requirement in the area is likely to remain strong and with its commercial operations there, the GGCL’s industrial retail distribution will further go up. Both are industrial areas where margins for supply of gas are high. The company expects by 2009 volume of 1 mscum per day of gas in Jagadia and the same from Vapi as well. Negotiations are going on with the suppliers for the additional gas supply. Current year in 2007, the company has laid down a capex plan of Rs 150 crore largely in these new locations in Gujarat which is the future retail target market for the company.
Evolving regulatory scenario will be favourable for the company
With the passing of the Gas Regulatory Bill, the industry saw a regulator coming with a proper pricing mechanism, and better, well co-coordinated downstream development. So far we only had a regulator in the upstream segment of gas ie the DGH. In Dec’06, Petroleum Act was amended and a downstream regulator Petoleum & Natural Gas Regulatory Broad Act (PNGRB) was passed and approved. The current regulatory environment has laid down the guidelines in three broad parameters namely-
Infrastructure exclusivity:
Marketing exclusivity:
Tariff Determination:
GGCL has been preparing itself to operate in a free market environment and is well positioned to reap its benefits.
Forex losses and increase in prices of natural gas in 2006 were passed on only in 2007
In Bulk customers, the company has a natural forex hedge and hence any appreciation or depreciation of rupee can immediately be passed on. However that is not the case with retail customers where there is no natural hedge and any rupee appreciation or depreciation has to be taken care of by price decrease or increase at time intervals. Considering the way the contracts of gas are negotiated with the suppliers, appreciation of rupee is postiive for the company and vice versa.
From May’06 till around Nov’06, the rupee depreciated. However the company had set up a policy where by they will review the natural gas price once in a year and hence increased the price only in Feb’07. So for the year ended Dec’06, the company had to bear the burden of rupee depreciation. However in Feb. 2007 prices were revised upward and the rupee appreciated significantly creating a win-win situation for the company for 2007. The company had increased the prices of natural gas in Feb’07 by 14% for its retail customers.
FY 06 (ended Dec. 2006) performance affected due to many one time events
For the year ended Dec’06, the consolidated net sales were up by 30% to Rs 968.50 crore. OPM was down by 310 basis points largely due to loss of transmission revenue (Rs 11.40 crore in 2006 as against Rs 28.60 crore in 2005), currency fluctuation (loss of Rs 1.23 crore) and one time spot purchase of gas in Q4’06. Thus OP growth was restricted to 1% to Rs 155.67 crore. There was an EO loss of Rs 6.43 crore in 2006 as against EO income of Rs 16.99 in 2005. As a result of which the PAT for 2006 stood at Rs 87.52 crore, down by 11% compared to Rs 98.12 crore in 2005.
Latest financial results confirm the improved prospects of the company
For the quarter ended June’07, the consolidated net sales increased by 26% to Rs 283.45 crore. The OPM was up by 720 basis points largely due to continuous emphasis on retail customers. As a result, the OP increased by 80% to Rs 68.25 crore. The other income was up by 4.75 crore. The interest cost was down by 97% to Rs 0.02 crore. The depreciation was up by 24% to Rs 9.48 crore. After providing tax and minority interest, the PAT stood at Rs 41.98 crore, up by 90%.
The volume of gas sold to the retail segment crossed 2.5 mmscmd and the number of vehicles running on CNG in the area of operation of Gujarat Gas crossed 50,000. The total volume of gas contracted in Jhagadia industrial estate has crossed 0.5 mmscmd.
For the half year ended June’07, the net sales stood at Rs 614.12 crore, up by 33% and PAT was up by 64% to Rs 79.58 crore.
Valuation
For year 2007, we expect the company to register consolidated net sales of Rs 1188.11 crore and PAT of Rs 156.94 crore. This gives an EPS of Rs 23.6. At current market price of Rs 277, the scrip trades at only 11.7 times its expected 2007 earnings. The 50% increase in firm supply of gas expected to commence from September 2007 will keep the company on healthy growth path in 2008 also.
| | 0312(12) | 0412(12) | 0512(12) | 0612(12) | 0712(12P) |
| Sales | 708.86 | 653.07 | 746.84 | 968.5 | 1188.11 |
| OPM (%) | 16.1 | 20.4 | 19.2 | 16.1 | 21.1 |
| OP | 114.00 | 133.55 | 143.2 | 155.67 | 251.18 |
| Other income | 17.9 | 11.46 | 15.63 | 16.12 | 16.59 |
| PBIDT | 131.9 | 145.01 | 158.83 | 171.79 | 267.78 |
| Interest | 2.05 | 0.11 | 2.92 | 2.2 | 0.56 |
| PBDT | 129.85 | 144.9 | 155.91 | 169.59 | 267.21 |
| Depreciation | 18.23 | 21.43 | 27.37 | 31.87 | 39.18 |
| PBT | 111.62 | 123.47 | 128.54 | 137.72 | 228.02 |
| EO: Extraordinary items | 0.00 | 0.00 | 16.99 | -6.43 | 8.00 |
| PBT after EO | 111.62 | 123.47 | 145.53 | 131.29 | 236.02 |
| Current Tax | 39.88 | 45.56 | 46.74 | 43.13 | 78.39 |
| Taxes of earlier years | 0.00 | 0.77 | 0.00 | 0.00 | 0.00 |
| PAT | 71.74 | 77.14 | 98.79 | 88.16 | 157.64 |
| Minority Interest | 1.06 | 0.23 | 0.67 | 0.64 | 0.70 |
| PAT after Minority Interest | 70.68 | 76.91 | 98.12 | 87.52 | 156.94 |
| EPS (Rs)* | 10.2 | 11.1 | 13.5 | 15.3 | 23.6 |
| * Annualised on current equity of Rs 12.83 crore of face value of Rs 2 | |||||
| Gujarat Gas: Consolidated Results |
| | 0706 (3) | 0606 (3) | Var. (%) | 0706 (6) | 0606 (6) | Var. (%) | 0612 (12) | 0512 (12) | Var. (%) |
| Sales | 283.45 | 225.2 | 26 | 614.12 | 460.54 | 33 | 968.5 | 746.84 | 32 |
| OPM (%) | 24.1 | 16.9 | | 19.9 | 17.9 | | 16.1 | 19.2 | |
| OP | 68.25 | 38.02 | 80 | 122.03 | 82.27 | 48 | 155.67 | 143.2 | 11 |
| Other income | 4.75 | 3.61 | 32 | 8.52 | 8.05 | 6 | 16.12 | 15.63 | -43 |
| PBIDT | 72.99 | 41.62 | 75 | 130.56 | 90.32 | 45 | 171.79 | 158.83 | 1 |
| Interest | 0.02 | 0.75 | -97 | 0.06 | 1.52 | -96 | 2.2 | 2.92 | -25 |
| PBDT | 72.97 | 40.87 | 79 | 130.49 | 88.8 | 47 | 169.59 | 155.91 | 2 |
| Depreciation | 9.48 | 7.67 | 24 | 18.52 | 15.07 | 23 | 31.87 | 27.37 | 16 |
| PBT before EO | 63.49 | 33.2 | 91 | 111.97 | 73.72 | 52 | 137.72 | 128.54 | -1 |
| EO | 0 | 0 | 0 | 8.0 | 0 | 100 | -6.43 | 16.99 | -100 |
| PBT after EO | 63.49 | 33.2 | 91 | 119.97 | 73.72 | 63 | 131.29 | 145.53 | -10 |
| Current Tax | 21.24 | 11.04 | 69 | 40.09 | 25 | 46 | 43.13 | 46.74 | -25 |
| PAT | 42.24 | 22.16 | 91 | 79.88 | 48.72 | 64 | 88.16 | 98.79 | -11 |
| Minority Interest | 0.26 | 0.1 | 178 | 0.3 | 0.28 | 7 | 0.64 | 0.67 | -4 |
| PAT after MI | 41.98 | 22.06 | 90 | 79.58 | 48.43 | 64 | 87.52 | 98.13 | -11 |
| EPS (Rs)* | 26 | 13.8 | | 24.6 | 15.1 | | 13.5 | 15.3 | |
| * Annualised on current equity of Rs 12.83 crore of face value of Rs 2 | |||||||||