Hold Gujarat Gas; target Rs 480: PINC Research

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Hold Gujarat Gas; target Rs 480: PINC Research

PINC Research has maintained hold rating on Gujarat Gas Company (GGAS) with a target price of Rs 480 in its November 3, 2011 research report.

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PINC Research has maintained hold rating on Gujarat Gas Company (GGAS) with a target price of Rs 480 in its November 3, 2011 research report.

"Gujarat Gas Company's (GGAS) Q3CY11 sales were inline with our expectations as it grew by 29.1%YoY to Rs6.4bn (PINCe Rs6.3bn) primarily led by higher realisations (+29.1%YoY). However, rise in LNG price and rupee depreciation led to increase in raw material cost which resulted in EBITDA/ scm at Rs3.6 (+26%YoY, -25% QoQ). Consequently, net profit of Rs801mn (+42%YoY, -16.7% QoQ) was lower than our expectation of Rs983mn. LNG prices have increased to ~USD17/mmbtu from ~USD10/mmbtu before the Japanese earthquake. This coupled with rupee depreciation has led to rise in raw material cost to Rs15/scm (+24%YoY, +14%QoQ). As a result, absolute EBITDA margin has contracted by 25% sequentially and we expect it to remain under pressure in subsequent quarters as incremental volume has to come from high-cost LNG (LNG share in volume is ~40%) and full impact of rupee depreciation will be seen in coming quarter."

"GGAS has hiked gas price for industrial customers by ~44% YTD constituting 83% in their portfolio. Similarly, it has taken a price hike of ~22% in their CNG segment. This led to increase in EBITDA/scm by 26%YoY despite increase in raw material cost. GGAS's volume increased by 3.5%YoY and 6.8% sequentially at 3.54mmscmd in Q3CY11. Industrial sales were flat due to increasing gas cost, however, the volumes for CNG segment saw a marginal growth. With limited visibility of domestic gas supply ramp-up, GGAS is looking to secure additional LNG to meet growth in its existing geographies (It has contracted 1.1mmscmd from BGIES and currently sourcing ~0.3mmscmd LNG in spot). GGAS is incurring a capex of ~Rs1.5bn/ year to increase network in its current operational area of Surat, Ankleshwar and Bharuch. The company has bid for Bhavnagar in 3rd round of CGD bidding. Authorization and winning of new geography will be key catalysts for GGAS, in our view."

"We have revised our earning estimates for CY11 and CY12 by 1.0% and 2.8% capturing strong pricing power. At the CMP of Rs444, the stock trades at a P/E of 15.8x and 14.5x and EV/ EBITDA of 11.2x and 10.2x for CY12E and CY13E respectively. Due to rich valuation, we maintain our 'HOLD' recommendation with a target price of Rs 480 (12-month forward DCF)," says PINC Research report.