Gujarat Gas' Q2FY19 results (Outperformer) - A miss on margins, prospects undiminished
Q2FY19 result highlights
- Gujarat Gas (GGL) adjusted PAT of Rs536mn, down 12% yoy (IDFCe 0.7bn). Sharp margin dip qoq (lower than est) drove the miss vs IDFCe. Volumes of 6.66mmscmd grew 16% yoy (IDFCe 6.55mmscmd)
- The volume strength driven by demand from CNG segment (+11% yoy) and strong growth in Industrial demand (+18% yoy). Domestic PNG demand was also strong, growing 17% yoy.
- Blended gas costs of Rs26.5/scm (US$10.1/mmbtu) were higher than IDFCe Rs26/cm (US$10/mmbtu), withr realisations of Rs30/scm (IDFCe Rs30.2) which led to gross margins of Rs5.6/scm and EBITDA/scm of Rs3/scm, vs IDFCe Gross/EBITDA of Rs6.2/3.6 per scm.
- Reported PAT of Rs411m was impacted by retrospective provision of Rs3.86bn for higher transmission charges (Rs1.9bn was for Q1).
Key positives: Record volumes
Key negatives: Higher than expected gas costs, dragging margins
Impact on financials: We reduce FY19/20/21E EPS by 3% to factor lower margins. TP revised to Rs865/sh.
Valuations & View
In our view, GGL’s growth prospects remain undiminished, notwithstanding a weak Q2. With the company already seeing traction from 11-12 additional districts being developed over last 2 years, GGL is also close to finalising the buyout of GAIL’s 50% stake in Vadodara Gas, subject to regulatory clearances, while our sense is that the Amritsar/Bhatinda licenses might be transferred to GGL from group company GSPC Gas. Overall, the company is on track to double volumes by FY23E to ~12 mmscmd from 6.4 in FY18. With the steadily building strength being seen in volumes and the higher margins, we see earnings visibility improving materially for GGL. Our estimates imply a CAGR of 10/3/6% in volumes/gross margins & EBITDA/scm over FY18-20E. Current valuations of 17x FY21E EPS and 7.8x EV/E remain attractive, with our revised TP implying 36% upside from here. Reiterate Outperformer.
Gujarat Gas Ltd Formerly known as Gujarat Gas Company Limited. Gujarat Gas Company Limited is an India-based company. The Company is engaged in Natural Gas Business in Gujarat. Natural gas business involves distribution of gas from sources of supply to centers of demand and to the end customers. The Company has underground pipe lines consists of mild steel (ME) and polyethylene (PE). These lines gas is supplied to Residential, Industrial, Commercial and Compressed Natural Gas (CNG). The Company also supplies piped natural gas to customers and retails compressed natural gas. Gas is used by customers for applications, such as heating, cooling, power and process. The Company has two subsidiaries namely Gujarat Gas Financial Services Limited and Gujaratgas Trading Company Limited.
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