Stock Market Result Update on Gujarat Gas for 2QCY2011

Stock Market Result Update on Gujarat Gas for 2QCY2011 with a Neutral recommendation.

Gujarat Gas’ (GGAS) 2QCY2011 net operating income, EBITDA and adjusted PAT grew by 39.8%, 50.2% and 66.7% yoy, respectively, on the back of higher realisation. We have a Neutral view on the stock.

Higher realisation drives 2QCY2011 profits: During 2QCY2011, GGAS’ top line increased by 39.8% yoy to `585cr mainly on account of higher realisation, led by the recent price hikes. Natural gas volumes sold during the quarter grew by 1.8% yoy to 302mmscm. Average sales realisation stood at `19.1/scm (+35.6% yoy and +11.2% qoq), led by hike in selling prices of the industrial retail and CNG segments. EBITDA grew by 50.2% yoy to `140cr, while EBITDA margin expanded by 167bp yoy to 24.0% on the back of the recent price hike across segments. Net profit grew by 66.7% yoy to `96cr.

Outlook and valuation: GGAS still awaits authorisation from PNGRB for its areas of operations. However, to pursue growth, the company has bid for a new area within Gujarat under the third round of bidding conducted by PNGRB. Besides volume growth, to maintain margins, the company plans to price its gas as per the pricing of alternative fuels. We believe, through this strategy, the company will be able to maintain volume growth and margins going ahead. At current levels, the stock is trading at 19.0x and 17.1x CY2011E and CY2012E earnings, respectively. We believe the stock is fairly valued at current levels; hence, we have a Neutral view on the stock.