| We initiate coverage on Gujarat Gas (GGAS), the monopoly distributor of natural gas in Bharuch, Ankleshwar, and Surat, the most important industrial areas in Gujarat. An extensive pipeline network and high service standards have enabled GGAS to establish strong barriers to entry against any future competition.
An improved outlook on gas supplies, we reckon, will drive a 16% CAGR in GGAS's gas sales through CY09-12ii. With its target market under-supplied (demand of 5-5.5mscmd vs supply of 3.3mscmd), GGAS remains in a sweet spot.
We forecast earnings CAGR of 20% through CY09-12ii. The company's parentage (BG Group) and free cash flow (~Rs3bn, pre-capex) make a strong case for geographical expansion.
Monopoly in Gujarat's industrial hub: GGAS is the sole distributor of natural gas in Bharuch, Ankleshwar and Surat, the most important industrial areas in Gujarat. GGAS is the least susceptible to competition in the cities in which it operates, given its 1) 3,500km pipeline network; 2) high service standards (reliability + safety); and 3) attractive pricing (lowest in India). At current volumes, we estimate its annual cash generation at ~Rs3bn. In a sweet spot:
As GGAS's markets are undersupplied, margins should not be difficult to maintain, in our view. This pricing power should drive earnings growth at 20% annually over the period. Initiate with BUY: competitive bids for city gas (CGD) operations. While valuations are not inexpensive in the context of the near-term business outlook, GGAS offers a play on the emerging CGD business in India. We initiate coverage with BUY. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice. |
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