3QCY2012 Result Update | Oil & Gas

November 5, 2012

Gujarat Gas
Performance Highlights
Quarterly highlights (Consolidated) Y/E Dec. (` cr) 3QCY2012 3QCY2011 % chg (yoy) 2QCY2012 % chg (qoq) Net operating income EBITDA EBITDA margin (%) Adj. PAT
Source: Company, Angel Research

NEUTRAL
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Net Debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Oil & Gas 3,831 242 1 438/270 35775.94 2 18762.87 5704.2 GGAS.BO GUJS@IN

`299 -

836 137 16.4 100

653 118 18.0 80

28.0 16.2 (167)bp 24.8

772 83 10.8 53

8.3 64.4 559bp 88.2

Gujarat Gas (GGAS) reported a strong growth in net profit on account of higher realizations. However, given the regulatory overhang on the stock, we recommend a Neutral rating on the stock. Top-line growth of 28.0% yoy driven by higher realization: The companys top-line increased by 28.0% yoy to `836cr mainly on account of higher realization (partially offset by lower volumes). The average sales realization grew by 42.6% yoy to `28.1/scm, led by hike in selling prices in both, industrial retail and CNG segments. However, natural gas volume sold fell by 9.5% yoy to 295mmscm during the quarter. Higher other income boosts bottom-line growth: The cost of goods sold increased by 42.6% yoy to `699cr on account of higher proportion of expensive RLNG sales (47% of total volumes). Hence, the EBITDA grew by only 16.2% yoy to `137cr, despite sales growth of 28.0% yoy. Other income increased by 87.8% yoy to `19cr. Consequently, the companys net profit increased by 24.8% yoy to `100cr. Outlook and valuation: The companys volumes have declined gradually during the past one year on account of higher price of spot LNG. Going forward, we believe that high price of LNG will continue to impact the volume growth of the company. Further, the recent proposal to cap gas marketing margin by the Petroleum and Natural Gas Regulatory Board (PNGRB) remains an overhang on the stock. At current levels, the stock is trading at 13.1x and 12.7x CY2012E and CY2013E earnings, respectively. Given the regulatory overhang, we maintain our Neutral rating on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 65.1 6.2 17.4 11.2

Abs. (%) Sensex GGAS

3m 9.1

1yr 6.8

3yr 16.8 49.6

(2.5) (31.9)

Key financials (Consolidated)

Y/E Dec. (` cr) Net sales % chg Net profit % chg OPM (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

CY2010 1,849 30.3 258 48.0 22.5 20.1 14.9 4.5 32.0 33.8 1.8 7.9

CY2011 2,472 33.7 272 5.7 16.1 21.2 14.1 4.9 33.3 29.5 1.4 8.4

CY2012E 3,167 28.1 292 7.3 13.2 22.8 13.1 3.9 33.2 29.3 1.0 7.8

CY2013E 3,752 18.5 302 3.3 11.7 23.5 12.7 3.5 29.2 27.1 0.8 7.2

Bhavesh Chauhan
Tel: 022- 3935 7800 Ext: 6821 bhaveshu.chauhan@angelbroking.com

Vinay Rachh
Tel: 022- 39357600 Ext: 6841 Vinay.rachh@angelbroking.com

Please refer to important disclosures at the end of this report

Gujarat Gas | 3QCY2012 Result Update

Exhibit 1: 2QCY2012 performance

Y/E March (` cr) Net Operating Income COGS Total operating expenditure EBITDA EBITDA Margin (%) Other Income Depreciation Interest PBT PBT Margin (%) Total Tax % of PBT PAT Minority interest Adj. PAT PAT Margin (%)
Source: Company, Angel Research

3QCY2012 836 699 699 137 16.4 19 16 0 140 16.7 40 28.7 100 0 100 11.9

3QCY2011 653 490 535 118 18.0 10 15 0 113 17.2 33 28.9 80 0 80 12.2

% chg (yoy) 28.0 42.6 30.6 16.2 87.8 5.6 11.1 24.0 23.1 24.3 24.8

2QCY2012 772 689 689 83 10.8 8 16 0 76 9.8 23 30.1 53 0 53 6.9

% chg (qoq) 8.3 1.5 1.5 64.4 129.0 2.0 0.0 84.4 75.4 88.2 88.2

9MCY2012 2332 1983 2035 296 12.7 56 47 0 306 13.1 89 29.0 217 216 9.3

9MCY2011 1767 1270 1400 367 20.8 34 44 0 356 20.2 108 30.2 249 248 14.0

% chg (yoy) 31.9 56.2 45.4 (19.2) 65.9 6.7 (70.8) (14.3) (17.7) (12.8) (12.7)

Top-line growth of 28.0% yoy driven by higher realization: The companys top-line increased by 28.0% yoy to `836cr mainly on account of higher realization. Average sales realization grew by 42.6% yoy to `28.1/scm, led by hike in selling prices of the industrial retail (from `26.5/kg to `29/kg) and CNG segment (from `49.9/kg to `51.9/kg). However, natural gas volume sold fell by 9.5% yoy to 295mmscm during the quarter.

Exhibit 2: Realizations increased to `28.1/scm...

330 320 23.5 20.4 16.8 19.1 19.7 20.0 26.5 28.1 30.0

Exhibit 3: ...leading to top-line growth of 28.0% yoy

900 800 700 600 39.8 28.7 36.8 31.9 29.0 26.8 28.0 44.0 40.0 36.0 32.0 28.0 24.0 20.0 16.0 12.0 8.0 4.0 -

(mmscm)

310 300 290 280 270

(`/scm

(` cr)

400 300 200 100

10.0

1QCY11 3QCY11 Gas volumes 1QCY12 3QCY12 Avg realization (RHS)

1QCY11 3QCY11 Operating revenues

1QCY12 3QCY12 Operating revenues growth (RHS)

Source: Company, Angel Research

Source: Company, Angel Research

November 5, 2012

(%)

500

Gujarat Gas | 3QCY2012 Result Update

Higher other income boosts bottom-line growth: The cost of goods sold increased by 42.6% yoy to `699cr on account of higher proportion of expensive RLNG sales (47% of total volumes). Hence, the EBITDA grew by only 16.2% yoy to `137cr. Other income also increased by 87.8% yoy to `19cr. Consequently, the companys net profit increased by 24.8% yoy to `100cr.

Exhibit 4: Average cost and margin trend

30.0 25.0 20.0 19.6 21.9 15.0 18.2 22.0

Exhibit 5: Operating profit trend

160 140 120 100 20.6 24.0 18.0 23.0 16.4 10.6 10.8 4.6 3.0 1QCY11 2QCY11 3QCY11 4QCY11 1QCY12 2QCY12 3QCY12 Operating Profit Operating Margins (RHS) 18.0 13.0 8.0

(`/scm)

10.9

10.0 5.0 0.0 1QCY11 2QCY11 3QCY11 4QCY11 1QCY12 2QCY12 3QCY12 Avg. blended margin Avg. gas cost 5.9 5.9 4.7 2.3 3.9 4.6 6.1

60 40 20 -

Source: Company, Angel Research

Source: Company, Angel Research

Exhibit 6: PAT growth trend

120 100 80 16.9 67.7 42.3 (10.9) 24.8 80.0 60.0 40.0 20.0

(` cr)

40 20 (69.7)

(44.8)

(20.0) (40.0) (60.0) (80.0)

1QCY11 2QCY11 3QCY11 4QCY11 1QCY12 2QCY12 3QCY12 PAT

Source: Company, Angel Research

PAT growth (RHS)

November 5, 2012

(%)

60

(%)

15.0

(` cr)

13.2

80

Gujarat Gas | 3QCY2012 Result Update

Investment arguments
RLNG to mute volume growth decline: Over the past one year, there have been some delays in receiving gas from KG-D6 on account of declining gas production. The company is ensuring that the shortfall in volume is compensated by higher RLNG procurement. Further, the recent Gujarat High Courts verdict to compulsorily convert all cars to natural gas could result in higher demand for gas which is likely to support volumes for GGAS over the medium term. Regulatory overhang to persist: After the verdict of the Delhi HC, the companys marketing margin remains outside the purview of PNGRB. However, PNGRB has indicated that it aims to regulate the marketing margins charged by the utilities. This could potentially impact GGASs tariffs and margins adversely in case there is a cap on marketing margin.

Outlook and valuation

The companys volumes have declined gradually during the past one year on account of higher price of spot LNG. Going forward, we believe that high price of LNG will continue to impact the volume growth of the company. Further, the recent proposal to cap gas marketing margin by PNGRB remains an overhang on the stock. At current levels, the stock is trading at 13.1x and 12.7x CY2012E and CY2013E earnings, respectively. Given the regulatory overhang, we maintain our Neutral rating on the stock.

Exhibit 7: Key assumptions

Particulars Sales volumes (mmscm) Blended Realisation (`/scm) Gas Purchase cost (`/scm)
Source: Company, Angel Research

CY2012E 1,604 19.5 16.8

CY2013E 1,799 20.6 18.5

Exhibit 8: Angel EPS forecast vs consensus

Angel Forecast CY2012E CY2013E
Source: Company, Angel Research

Bloomberg Consensus

Variation (%) 8.0 5.1

22.8 23.5

21.1 22.4

November 5, 2012

Gujarat Gas | 3QCY2012 Result Update

Exhibit 9: One-year forward P/E

500 450 400 350 300 250 200 150 100 50 0

(`)

Oct-07

Nov-09

Feb-11

Sep-10

7x
Source: Company, Angel Research

10x

13x

16x

Exhibit 10: Recommendation summary

Company GGAS* IGL GSPL CMP (`) 299 263 75 TP (`) Neutral Neutral Neutral Reco. Mcap (` cr) 3,831 3,699 4,248 Upside (%) P/E (x) FY13E 13.1 10.7 8.9 FY14E 12.7 9.5 10.2 P/BV (x) FY13E 3.9 2.5 1.5 FY14E 3.5 2.1 1.4 EV/EBITDA (x) FY13E 7.8 5.2 5.2 FY14E 7.2 4.0 5.4 RoE (%) FY13E 33.2 25.5 23.3 FY14E 29.2 23.6 18.1 RoCE (%) FY13E FY14E 29.3 27.8 21.5 27.1 28.2 17.6

Source: Angel Research; Note: For GGAS* FY13E = CY12E and FY14E = CY13E

Company background
GGas is one of the largest private sector players in natural gas transmission and distribution business in Gujarat. GGas became a subsidiary of the BG Group in 1997 as the latter acquired more than 60% shares from Mafatlal and others and later increased its stake to 65%. During the last five years, the company has expanded in southern Gujarat and has exclusive distribution rights in the industrialized cities of Surat, Ankleshwar and Bharuch. Currently, it supplies gas to more than 349,000 domestic, commercial and industrial customers. The companys pipeline network is spread over 3,700km. During October 2012, Gujarat State Petroleum Corporation has announced to acquire the entire 65% BG Groups stake in GGas.

November 5, 2012

May-12
19x

Aug-08

Mar-08

Dec-11

Oct-12

Jan-09

Jun-09

Apr-10

Jul-11

Gujarat Gas | 3QCY2012 Result Update

Profit & loss statement (Consolidated)

Y/E December (` cr) Gross sales Less: Excise duty Net Sales Other operating income Total operating income % chg Total Expenditure Net Raw Materials Other Mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation & Amortisation EBIT % chg (% of Net Sales) Interest & other Charges Other Income (% of PBT) Share in profit of Associates Recurring PBT % chg Extraordinary Expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) Add: Share of earnings of asso. Less: Minority interest (MI) Prior period items PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg CY2008 CY2009 CY2010 CY2011 CY2012E CY2013E 1,293 19.0 1,274 27 1,301 4.5 1,066 934 16 41 75 235 (6.4) 18.1 42 193 (9.1) 14.9 0 41 17.6 235 1.9 235 73 31.1 162 1 161 161 5.0 12.3 12.5 12.5 5.0 1,409 21.7 1,387 33 1,420 9.1 1,140 1,003 20 45 72 280 18.8 19.7 47 232 20.0 16.4 0 27 10.3 259 10.3 259 84 32.3 175 1 174 174 8.4 12.3 13.6 13.6 8.4 1,842 28.5 1,814 36 1,849 30.3 1,434 1,286 26 50 71 416 48.7 22.5 54 361 55.7 19.5 0 22 5.8 383 48.2 383 124 32.4 259 1 258 258 48.0 13.9 20.1 20.1 48.0 2,472 38.1 2,434 38 2,472 33.7 2,022 1,840 36 61 86 397 (4.4) 16.1 60 337 (6.8) 13.6 1 56 14.4 392 2.2 392 118 30.2 274 1 272 272 5.7 11.0 21.2 21.2 5.7 3,177 49.0 3,128 39 3,167 28.1 2,748 2,510 54 95 89 419 5.6 13.2 63 356 5.7 11.2 1 64 15.4 419 7.0 419 126 30.0 294 1 292 292 7.3 9.2 22.8 22.8 7.3 3,765 58.1 3,707 45 3,752 18.5 3,312 2,984 64 113 151 440 4.9 11.7 72 368 3.5 9.8 1 66 15.2 433 3.3 433 130 30.0 303 1 302 302 3.3 8.0 23.5 23.5 3.3

November 5, 2012

Gujarat Gas | 3QCY2012 Result Update

Balance sheet (Consolidated)

Y/E December (` cr) SOURCES OF FUNDS Equity Share Capital Preference Capital Reserves& Surplus Shareholders Funds Minority Interest Total Loans Deferred Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 767 285 482 134 356 175 22 25 128 241 (66) 906 914 333 581 136 448 179 8 26 145 348 (168) 996 1,019 383 636 138 583 188 9 19 159 405 (217) 1,140 1,109 438 671 161 531 237 14 19 203 460 (223) 1,141 1,219 501 718 181 531 373 81 25 266 514 (141) 1,289 1,330 573 757 200 531 535 190 30 315 598 (62) 1,427 13 14 697 725 4 127 50 906 28 14 738 780 5 155 56 996 29 14 815 859 6 207 67 1,140 31 14 758 803 7 256 74 1,141 31 14 942 987 9 220 74 1,289 31 14 1,063 1,108 10 235 74 1,427 CY08 CY09 CY10 CY11 CY12E CY13E

November 5, 2012

Gujarat Gas | 3QCY2012 Result Update

Cash Flow Statement (Consolidated)

Y/E December Profit before tax Depreciation Change in Working Capital Less: Other income Direct taxes paid Cash Flow from Operations (Inc.)/ Dec. in Fixed Assets (Inc.)/ Dec. in Investments Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances CY2008 234.5 41.8 11.6 (24.8) (57.4) 205.8 (89.9) (126.0) 23.5 (192.4) 15.4 (24.0) (8.5) 4.9 18 22 CY2009 258.6 47.4 (29.6) (20.5) (77.8) 178.0 (151.7) (62.9) 17.9 (196.6) 28.0 (24.0) 4.0 (14.6) 22 8 CY2010 383.0 54.2 (14.8) (14.2) (123.6) 284.6 (112.0) (123.2) 20.6 (214.6) 52.0 (120.5) (68.5) 1.5 8 9 CY2011 CY2012E CY2013E 393 60 6 (45) (111) 302 (111) 53 38 (20) 1 49 (328) (278) 5 9 14 419 63 28 (64) (126) 321 (130) 64 (66) (37) (151) (188) 67 14 81 433 72 15 (66) (130) 324 (130) 66 (64) 15 (166) (151) 109 81 190

November 5, 2012

Gujarat Gas | 3QCY2012 Result Update

Key ratios
Y/E December Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV/Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis (%) EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT/Int.) (0.5) (1.6) 1,742.7 (0.6) (1.5) 1,706.9 (0.7) (1.3) 782.3 (0.7) (1.3) 226.1 (0.6) (1.3) 356.0 (0.6) (1.5) 368.3 1.8 5 26 63 (24) 1.7 5 27 62 (34) 1.9 3 25 52 (40) 2.3 2 25 43 (35) 2.7 2 24 42 (27) 2.9 2 26 44 (11) 23.4 28.3 25.1 24.4 29.0 23.6 33.8 39.2 32.0 29.5 34.4 33.3 29.3 35.8 33.2 27.1 71.8 29.2 14.9 69.3 1.6 16.6 16.6 16.4 67.7 1.5 16.8 16.8 19.5 67.6 1.7 23.1 23.1 13.9 69.8 2.1 20.9 20.9 11.2 70.0 2.7 21.4 21.4 9.8 70.0 6.2 42.7 42.7 12.5 12.5 15.8 1.5 55.3 13.6 13.6 17.3 8.0 59.7 20.1 20.1 24.3 12.0 65.9 21.2 21.2 25.9 10.0 61.5 22.8 22.8 27.7 10.0 75.8 23.5 23.5 29.1 11.0 85.3 23.9 18.9 5.4 0.5 1.2 6.5 1.7 22.0 17.3 5.0 2.7 2.4 12.2 3.4 14.9 12.3 4.5 4.0 1.8 7.9 2.9 14.1 11.5 4.9 3.3 1.4 8.4 2.9 13.1 10.8 3.9 3.3 1.0 7.8 2.5 12.7 10.3 3.5 3.7 0.8 7.2 2.2 CY08 CY09 CY10 CY11 CY12E CY13E

November 5, 2012

Gujarat Gas | 3QCY2012 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Gujarat Gas No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors.

Ratings (Returns):

Buy (> 15%) Reduce (-5% to -15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

November 5, 2012

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