Gujarat Gas: Prospects hinge on volume recovery

Rising dependence on higher-priced LNG impacts demand from industrial segment, resulting in March quarter's poor show

Gujarat Gas, the natural gas transmission and distribution company, reported a dismal set of numbers for the quarter ending March. Revenue, impacted by lower gas volumes, was up 6.1 per cent over a year to Rs 768 crore. Rising liquefied natural gas (LNG) prices led to a 13.2 per cent decline in volumes over the March 2012 quarter.

With a rising proportion of LNG in the volumes sold, the variable cost rose 25 per cent, resulting in a 23 per cent rise in selling price. Consequently, average sales realisations surged 41.4 per cent to Rs 28.9 per standard cubic metre (scm). Notably, LNG forms 50 per cent of their total supplies, forcing the company to pass on the higher prices to customers. The company raised prices for industrial retail customers by four per cent from February. These higher prices hit demand from small and medium enterprises (SMEs).

LNG prices have currently declined to $14-16 per million British thermal unit (mBtu) from the $18-20 per mBtu in February-March. “We expect LNG prices to soften on account of capacity addition globally. However, our assumption of gross spread at Rs 5.2 per scm for CY2013 and Rs 5.5 per scm for CY2014 could face a risk if LNG prices remain at higher levels and if the GSPC group implements a strategy of volume expansion at the cost of gross spread,” says Mayur Matani, oil and gas analyst at ICICI Securities.

A 15.4 per cent rise in gross spreads to Rs 4.5 per scm over the March 2012 quarter was more than offset by an 8.2 per cent increase in gas costs, driven by higher dependence on expensive LNG. Consequently, the Ebitda (earnings before interest, taxes, depreciation and amortisation) margin contracted 120 basis points to 9.4 per cent. Other income fell 12 per cent to Rs 26 crore. Not surprisingly, the company’s net profit fell 7.1 per cent over the March 2012 quarter, to Rs 59 crore.

Valuations, outlook
Lower production from the KG-D6 block, coupled with higher spot LNG prices, compressed Gujarat Gas’ volumes in the past year. Notably, gas sales volumes fell 19 per cent to 264 million standard cubic metres a day (mscmd) since the September 2011 quarter and have declined every quarter since. Analysts have reduced their volume estimates to 3.05 mscmd in CY13 and 3.21 mscmd in CY14, to factor in lower demand due to high LNG prices.

“We expect volumes to be under pressure until LNG prices correct and stabilise at $10/mBtu, which seems very unlikely in the medium term. We reiterate our sell rating on the stock, with a target price of Rs 270 at 13.5 times CY14 estimated earnings. Any favourable judgment from the Supreme Court IGL-PNGRB case could be an opportunity to exit the stock at a higher price,” says Vinay Nair, oil and gas analyst at Karvy Stock Broking.

The stock is trading at 10.6 times CY13 estimated earnings, inexpensive when compared to its historical one-year forward price/earnings band of eight to 19 times. However, volume recovery is the key which will make analysts more positive on the company.