1QCY2013 Result Update | Oil & Gas

May 3, 2013

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

NEUTRAL
CMP Target Price
Investment Period
724 76 10.6 64 6.1 (5.4) (114)bp (7.1) 762 110 14.5 70 0.7 (34.4) (505)bp (15.0)

`247 -

1QCY2013 1QCY2012 % chg (yoy) 4QCY2012 % chg (qoq) 768 72 9.4 59

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 3,170 140 0.5 353/238 18,361 2 19,576 5,944 GGAS.BO GUJS@IN

Gujarat Gas (GGAS) reported disappointing 1QCY2013 results due to lower volumes coupled with higher costs. We maintain our Neutral rating on the stock. Muted top-line growth of 6.1% due to lower volumes: The company reported a muted top-line growth of 6.1% yoy to `768cr due to lower volumes, which however were more than offset by higher realizations. Average sales realization grew by 41.4% to `28.9/scm. Natural gas volume sold fell by 15.9% yoy to 264mmscm during the quarter. The fall was mainly in the industrial PNG segment due to higher prices of gas during the quarter. Higher gas costs dent EBITDA: The cost of gas increased by 8.2% yoy to `644cr on account of higher proportion of expensive RLNG sales. Hence, the EBITDA declined by 5.4% yoy to `72cr. Other income also declined by 12.0% yoy to `26cr. Consequently, the companys net profit declined by 7.1% yoy to `59cr. Outlook and valuation: The companys volumes have declined gradually during the past one year on account of higher price of spot LNG and lower production from the KG D6 block. Going forward, we believe that high price of LNG will continue to impact 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 10.6x and 10.4x CY2013E and CY2014E 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 2.0 15.3 17.7

Abs. (%) Sensex GGAS

3m (1.0)

1yr 14.1

3yr 12.6 (9.0)

(21.0) (22.5)

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

CY2011
2,419 30.8 273 5.2 16.5 21.2 11.6 4.0 33.3 29.5 1.1 6.7

CY2012E
3,096 28.0 286 4.5 13.2 22.3 11.1 3.3 32.6 28.3 0.8 6.4

CY2013E
3,704 19.6 298 4.1 11.6 23.2 10.6 2.9 29.1 26.6 0.7 5.8

CY2014E
3,820 3.1 306 2.8 11.7 23.9 10.4 2.6 26.5 24.8 0.6 5.4

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 | 1QCY2013 Result Update

Exhibit 1: 1QCY2013 performance

Y/E Dec. (` 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

1QCY2013 768 644 696 72 9.4 26 19 0 80 10.4 20 25.0 60 0 59 7.7

1QCY2012 724 595 648 76 10.6 29 16 0 90 12.5 26 28.6 64 0 64 8.8

% chg (yoy) 6.1 8.2 7.4 (5.4) (12.0) 19.2 (11.8) (22.9) (7.3) (7.1)

4QCY2012 762 604 652 110 14.5 10 18 0 102 13.4 32 31.0 70 0 70 9.2

% chg (qoq) 0.7 6.7 6.7 (34.4) 153.9 2.2 (21.9) (37.0) (15.1) (15.0)

CY2012 3094 2483 2687 407 13.2 67 65 1 407 13.2 120 29.5 287 1 286 9.2

CY2011 2419 1840 2022 397 16.4 56 60 0 393 16.3 118 30.1 275 1 274 11.3

% chg (yoy) 27.9 35.0 32.9 2.5 18.8 8.0 3.5 1.5 4.4 (25.8) 4.6

Muted top-line growth of 6.1% due to lower volumes: The company reported a muted top-line growth of 6.1% yoy to `768cr due to lower volumes which were however more than offset by higher realizations. Average sales realization grew by 41.4% to `28.9/scm. Natural gas volume sold fell by 15.9% yoy to 264mmscm during the quarter. The fall was mainly in the industrial PNG segment due to higher prices of gas during the quarter.

Exhibit 2: Volumes declined to 264mmscm....

350 300 250 326 314 304 289 295 40.0 270 264 30.0

Exhibit 3: .... leading to muted top-line growth of 6.1%

900 800 700 600 28.7 26.8 36.8 31.9 28.0 40.0 36.0 32.0 28.0 24.0 17.1 20.0 16.0 12.0 8.0 6.1 3QCY11 1QCY12 3QCY12 1QCY13 4.0 -

(mmscm)

( ` cr)

150 100 50 0 3QCY11 1QCY12 Gas volumes 3QCY12 1QCY13 Avg realization (RHS)

20.0

400 300 200 100 -

10.0

Operating revenues

Operating revenues growth (RHS)

Source: Company, Angel Research

Source: Company, Angel Research

Higher gas costs dent EBITDA: The cost of gas increased by 8.2% yoy to `644cr on account of higher proportion of expensive RLNG sales. Hence, the EBITDA declined by 5.4% yoy to `72cr. Other income also declined by 12.0% yoy to `26cr. Consequently, the companys net profit declined by 7.1% yoy to `59cr.

May 3, 2013

(%)

200

( ` /scm

500

Gujarat Gas | 1QCY2013 Result Update

Exhibit 4: Average cost of gas rose to `24.4/scm

35.0 30.0 25.0 21.9 19.6 15.0 18.2 22.0 22.4 24.4

Exhibit 5: Operating margins declined to 9.4%

160 140 120 100 18.0 10.6 10.8 23.0 16.4 14.5 4.6 9.4 8.0 3.0 3QCY11 4QCY11 1QCY12 2QCY12 3QCY12 4QCY12 1QCY13 Operating Profit Operating Margins (RHS) 18.0 13.0

( ` /scm)

( ` cr)

20.0 15.0 10.0 5.0 0.0 4.7 2.3

60 3.9 4.6 6.1 5.7 4.5 40 20 3QCY11 4QCY11 1QCY12 2QCY12 3QCY12 4QCY12 1QCY13 Avg. blended margin Avg. gas cost

Source: Company, Angel Research

Source: Company, Angel Research

Exhibit 6: Net Profit declined 7.1% yoy

120 100 80 181.9 200.0 180.0 160.0 140.0 120.0 100.0 80.0 60.0 40.0 20.0 (20.0) (40.0) (60.0) (80.0) (100.0)

(` cr)

(10.9) 42.3 (44.8) 24.8 (69.7) (7.1)

40 20 -

3QCY11 4QCY11 1QCY12 2QCY12 3QCY12 4QCY12 1QCY13 PAT

Source: Company, Angel Research

PAT growth (RHS)

Investment arguments
Expensive RLNG to mute volume growth: Over the past one year, there has been a decline in gas production from KG-D6. The company is ensuring that the shortfall in volume is partially compensated by higher RLNG procurement which is however, expensive and not feasible for several of Ggass customers. Hence, we expect volume growth to remain muted over the coming two years. Regulatory overhang to persist: After the verdict of the Delhi High Court, 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.

May 3, 2013

(%)

60

(%)

80

Gujarat Gas | 1QCY2013 Result Update

Outlook and valuation

The companys volumes have declined gradually during the past one year on account of higher price of spot LNG and lower production from KG D6 block. 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 10.6x and 10.4x CY2013E and CY2014E 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

CY2013E 1,773 20.6 18.5

CY2014E 1,820 20.7 19.1

Exhibit 8: Angel EPS forecast vs consensus

Angel Forecast CY2013E CY2014E
Source: Company, Angel Research

Bloomberg Consensus

Variation (%) 4.5 3.3

23.2 23.9

22.2 23.1

Exhibit 9: One-year forward P/E

500 450 400 350 300 250 200 150 100 50 0

(` )

Feb-09

Oct-10

Nov-07

May-10

Nov-12

Sep-08

Dec-09

Aug-11

Jan-12

Jun-12

Apr-08

7x
Source: Company, Angel Research

10x

13x

Mar-11

16x

19x

May 3, 2013

Apr-13

Jul-09

Gujarat Gas | 1QCY2013 Result Update

Exhibit 10: Recommendation summary

Company GGAS PLNG CMP (`) 247 139 TP (`) 167 Neutral Buy Reco. Mcap (` cr) 3,170 10,612 Upside 20 P/E (x) 10.6 9.3 10.4 8.3 P/BV (x) 2.9 1.9 2.6 1.6 EV/EBITDA (x) 5.8 5.5 5.4 4.8 RoE (%) 29.1 22.9 26.5 21.5 RoCE (%) 26.6 21.6 24.8 22.9 (%) CY13E CY14E CY13E CY14E CY13E CY14E CY13E CY14E CY13E CY14E

IGL GSPL

309 66

Neutral Neutral

4,365 3,685

11.6 8.4

10.2 6.8

2.4 1.1

2.0 1.0

5.3 3.7

4.5 3.0

22.6 14.1

21.7 15.6

26.5 16.0

27.7 17.9

*For IGL, PLNG and GSPL: CY13E=FY14E and CY14E=FY15E

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 announced to acquire the entire 65% BG Groups stake in GGas.

May 3, 2013

Gujarat Gas | 1QCY2013 Result Update

Profit & loss statement (Consolidated)

Y/E December (` cr) Total operating income % chg Total Expenditure Net Raw Materials Other Mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation & Amortization 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 CY2009 CY2010 CY2011 CY2012 CY2013E CY2014E 1,420 9.1 1,140 1,003 20 45 72 280 18.8 19.7 47 232 20.0 16.4 27 10.3 259 10.3 259 84 32.3 175 1 174 174 8.4 12.3 13.6 13.6 8.4 1,849 30.3 1,432 1,286 97 50 (2) 418 49.4 22.6 54 363 56.5 19.7 22 5.8 (2.0) 383 48.2 (2.0) 385 124 32.3 261 (2) 1 (2) 260 262 50.3 14.2 20.1 20.1 48.0 2,419 30.8 2,021 1,840 121 61 (1) 398 (4.7) 16.5 60 338 (7.0) 14.0 1 56 14.4 (1.0) 392 2.2 (1.0) 393 118 30.1 275 (1) 1 (1) 273 274 4.8 11.3 21.2 21.2 5.7 3,096 28.0 2,688 2,484 140 64 408 2.6 13.2 66 343 1.3 11.1 2 67 16.4 408 4.1 408 121 29.7 287 1 286 286 4.2 9.2 22.3 22.3 4.9 3,704 19.6 3,273 2,984 63 76 149 431 5.6 11.6 72 359 4.9 9.7 1 69 16.1 427 4.7 427 128 30.0 299 1 298 298 4.1 8.0 23.2 23.2 4.1 3,820 3.1 3,372 3,074 63 80 156 447 3.8 11.7 78 370 2.9 9.7 1 70 16.1 439 2.8 439 132 30.0 307 1 306 306 2.8 8.0 23.9 23.9 2.8

May 3, 2013

Gujarat Gas | 1QCY2013 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 914 333 581 136 448 179 8 26 145 348 (168) 0 996 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 1,219 503 715 181 531 365 80 25 260 510 (146) 1,283 1,330 575 755 200 531 527 186 30 311 598 (71) 1,416 531 639 284 31 325 612 27 1,565 1,441 653 788 219 CY2009 CY2010 CY2011 CY2012E CY2013E CY2014E 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 14 936 980 9 220 74 1,283 31 14 1,052 1,097 10 235 74 1,416 31 14 1,192 1,237 11 243 74 1,565

May 3, 2013

Gujarat Gas | 1QCY2013 Result Update

Cash Flow Statement (Consolidated)

Y/E December (` cr) 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 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 CY2014E 393 60 6 (45) (111) 302 (111) 53 38 (20) 1 49 (328) (278) 5 9 14 408 66 31 (67) (121) 317 (130) 67 (63) (37) (151) (188) 66 14 80 427 72 17 (69) (128) 319 (130) 69 (61) 15 (166) (151) 106 80 186 439 78 (70) (132) 315 (130) 70 (60) 8 (166) (158) 97 186 284

May 3, 2013

Gujarat Gas | 1QCY2013 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 (0.6) (1.5) (0.7) (1.3) 782.3 (0.7) (1.3) 226.1 (0.6) (1.4) 216.8 (0.6) (1.5) 359.3 (0.6) (1.7) 369.6 1.7 5 27 62 (34) 1.9 3 25 52 (40) 2.3 2 25 43 (35) 2.7 2 25 42 (27) 2.9 2 25 44 (24) 2.8 2 27 48 (12) 24.4 29.0 23.6 33.8 39.2 32.0 29.5 34.4 33.3 28.3 34.5 32.6 26.6 35.1 29.1 24.8 71.8 26.5 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 11.1 70.3 2.7 20.7 20.7 9.7 70.0 3.0 20.7 20.7 9.7 70.0 6.2 42.1 42.1 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 22.3 22.3 27.4 10.0 75.3 23.2 23.2 28.8 11.0 84.4 23.9 23.9 29.9 11.0 95.3 18.2 14.3 4.1 3.2 1.9 9.8 2.7 12.3 10.2 3.8 4.9 1.4 6.3 2.3 11.6 9.5 4.0 4.0 1.1 6.7 2.3 11.1 9.0 3.3 4.0 0.8 6.4 2.0 10.6 8.6 2.9 4.5 0.7 5.8 1.8 10.4 8.3 2.6 4.5 0.6 5.4 1.5 CY2009 CY2010 CY2011 CY2012E CY2013E CY2014E

Interest Coverage (EBIT/Int.) 1,706.9

May 3, 2013

Gujarat Gas | 1QCY2013 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%)

May 3, 2013

10