Stock Review: Gujarat Gas

 

The scrip of Gujarat Gas gained 17.8% in just three trading sessions, after announcing excellent numbers for the December quarter and a hefty 12 per share dividend. The inspiring performance was fuelled by higher gas volumes as well as increased sales price that boosted margins. However, rich valuations are expected to limit further upside in the scrip in near term.

The company's gas volumes grew 13% to 309 million metric standard cubic meters (MMSCM) in the December 2010 quarter from 274 mmscm in year-ago period. Nearly 83% of these sales were to industrial large consumers while CNG and domestic users of natural gas made up the rest 17%.

The company, which had to resort to expensive imported LNG in the September quarter, saw its cost of raw material dropping substantially in December as the disrupted supply from the Panna Mukta Tapti (PMT) fields was restored. The cost per cubic meter in the September quarter stood at . 12.1, which dropped to . 10.9 in December 2010.

The selling price, however, was higher in December at . 16.5 per SCM compared with . 15.8 in September and . 13.8 in year-ago period. This substantially boosted the company's operating margins, which stood at 25.1% against 19.9% in the yearago period. The company posted a 77% jump in net profit to . 82 crore with 33% higher net sales during the December quarter to . 504.3 crore.

The company's growth strategy is, however, mainly focused on intensive growth in its existing area of operation and extending only to immediately adjacent areas. For example, in the recent round of bid-ding conducted by PNGRB for seven cities, Gujarat Gas bid only for the Bhavnagar region.

The company has signed a 39-month supply contract with a parent group company for sourcing 0.5 million tone of LNG per annum to meet the growing demand of natural gas in the areas it operates. As the incremental growth starts coming from the regassified LNG, the company is expected to face margin pressure.

The company remains a cashrich debt-free company, which ended the year 2010 with 540 crore of cash. The 12 per share dividend that the company announced for the year will mean an outflow of around 180 crore, which will leave the company with resources worth . 360 crore for investing in future growth. Thanks to the run-up in the past three sessions, the scrip is now trading at 19.8 times its earnings for the 12 months of 2010. The dividend yield works out to 3%. In spite of the excellent performance, the valuations appear rich, limiting further upside in the stock.