Accumulate Gujarat Gas; target Rs 348: Emkay

"Gujarat Gas (GGCL) reported results which were broadly inline with our estimates. Top line for the quarter stood at Rs7.7bn, growth of 32%YoY, mainly on better realization led by recent price hike in across the segment. EBITDA during the quarter was at Rs0.8bn, decline of 40.4% YoY. During the quarter EBIDTA margin increased by 27.7bps QoQ and decline of 1312bps YoY to 10.8%, mainly due to depreciation of rupee and higher cost of raw material specifically spot RLNG led to higher cost of RM. Consequently company reported net profit of Rs0.5bn, a decrease of 45% YoY. Natural gas volume sold during the quarter was 289mmscm, decline of 4.3% YoY and 4.9% sequentially, mainly on the back of lower offtake from industrial segment.

During the quarter average sales realization stood at Rs26.5 /scm, growth of 38.8% YoY and 11.3% QoQ, led by hike in selling prices of Industrial Retail (from Avg. Rs26.4/scm to Rs28.9/scm) and CNG segment (from Rs49.9/kg to Rs 51.9/kg). Current selling price of CNG stands at Rs.51.9/kg. During the quarter cost of gas (RM) has increased by 65.9% YoY and 12% QoQ to Rs 21.9/scm resulting in gross margin contraction of 22.2% YoY to Rs4.6/scm, mainly due to depreciation of rupee and higher cost of RLNG led to higher cost of raw material. However gross margin has improved from Rs4.2/scm to Rs4.6/scm on QoQ, on the back of hike in selling price across all the segments (i.e. CNG and Industrial Retail).

During the quarter company had faced margin pressure backed by high cost of RLNG, which constitutes almost 35% of the total raw material consumption. However we believe margins would start picking up from Q3CY12 onwards on the back of recent increase in prices of Industrial and CNG segment and softening in LNG prices from $16-17mmbtu to $12-13/mmbtu. However, the recent news on proposed cap on gas marketing margin, which is to be decided by PNGRB, would keep the stock under pressure until any clarity emerges. We have changed our valuation methodology from DCF to PE on account of higher uncertainty on future earnings, arising out of capping of marketing margin (regulatory concerns). Hence, we have changed our TP from Rs.397 to Rs.348 by assigning PE multiple of 13.2x (last 5 years average) and lowered our rating from Buy to Accumulate. At CMP, the stock trades at 11.7x CY13 EPS and 2.6x P/BV," says Emkay Global Financial Services research report.

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