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2QCY2013 Result Update | Oil & Gas

August 10, 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
772 83 10.8 53 (2.7) 87.4 999bp 91.1 768 72 9.4 59 (2.2) 115.8 1136bp 70.3

`195 -

2QCY2013 2QCY2012 % chg (yoy) 1QCY2013 % chg (qoq) 751 156 20.8 101

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 2,498 (429) 1 353/159 9,266 2 18,789 5,566 GGAS.BO GUJS@IN

Gujarat Gas (GGAS) reported a strong set of results for 2QCY2013 on the back of higher realizations coupled with lower costs. However, we maintain our Neutral rating on the stock. Top-line decreases by 2.7% due to lower volumes: The company reported a 2.7% decline in top-line as volumes declined by 17.3% yoy to 239mmscm. Lower volumes were partially offset by higher realizations which grew by 17.9% to `31.2/scm. Lower gas costs boost EBITDA: The cost of gas sold decreased by 14.5% yoy to `542cr which led to the EBITDA increasing by 87.4% yoy to `156cr. The companys other income also increased by 52.3% yoy to `13cr which led to the net profit increasing by 91.1% yoy to `101cr. 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 8.6x and 8.4x 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 (6.0)

1yr 6.8

3yr 3.6 (39.0)

(23.1) (36.9)

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)

CY2011
2,419 30.8 273 5.2 16.5 21.3 9.2 3.2 33.4 29.5 0.8 5.0

CY2012
3,096 28.0 286 4.5 13.2 22.3 8.7 2.6 32.6 27.7 0.7 5.1

CY2013E
3,316 7.1 290 1.3 12.8 22.6 8.6 2.3 28.2 25.0 0.6 4.7

CY2014E
3,460 4.3 296 2.1 12.6 23.1 8.4 2.0 25.6 23.3 0.5 4.0

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

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

Source: Company, Angel Research; Note: CMP as of August 8, 2013

Please refer to important disclosures at the end of this report

Gujarat Gas | 2QCY2013 Result Update

Exhibit 1: 2QCY2013 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

2QCY2013 751 542 595 156 20.8 13 19 150 19.9 48 32.3 101 101 13.5

2QCY2012 772 634 689 83 10.8 8 16 76 9.8 23 30.1 53 53 6.9

% chg (yoy) (2.7) (14.5) (13.6) 87.4 52.3 19.2 97.8 112.3 91.6 91.1

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

% chg (qoq) (2.2) (15.9) (14.5) 115.8 (51.7) 0.5 88.3 143.2 70.0 70.3

CY2012 3096 2483 2688 408 13.2 67 65 407 13.1 120 29.5 287 1 286 9.2

CY2011 2419 1840 2022 398 16.4 56 60 393 16.3 118 30.1 273 1 274 11.3

% chg (yoy) 28.0 35.0 33.0 2.5 18.8 8.0 3.5 1.5 5.1 (25.8) 4.6

Top-line decreases by 2.7% yoy due to lower volumes: The company reported a 2.7% decline in top-line due to a decline in volumes by 17.3% yoy to 239mmscm. Lower volumes were partially offset by higher realizations which grew by 17.9% to `31.2/scm.

Exhibit 2: Volumes declined to 239mmscm....


350 300 250 314 304 289 295 40.0 270 264 239 30.0

Exhibit 3: .... leading to top-line declining by 2.7%


900 800 700 600 26.8 31.9 36.8 40.0 36.0 32.0 28.0 24.0 20.0 16.0 12.0 8.0 4.0 (4.0) (8.0)

28.0 17.1 6.1

(mmscm)

( ` cr)

150 100 50 0 4QCY11 1QCY12 2QCY12 3QCY12 4QCY12 1QCY13 2QCY13 Gas volumes Avg realization (RHS)

20.0

400 300 200 100 4QCY11 2QCY12 4QCY12 Operating revenues (2.7) 2QCY13

10.0

Operating revenues growth (RHS)

Source: Company, Angel Research

Source: Company, Angel Research

Lower gas costs boost EBITDA: The cost of gas sold decreased by 14.5% yoy to `542cr which led to the EBITDA increasing by 87.4% yoy to `156cr. The companys other income also increased by 52.3% yoy to `13cr which led to the net profit increasing by 91.1% yoy to `101cr.

August 10, 2013

(%)

200

( ` /scm

500

Gujarat Gas | 2QCY2013 Result Update

Exhibit 4: Average cost of gas stood at 22.7/scm


35.0 30.0 25.0 21.9 19.6 18.2 8.6 4.5 22.0 22.4 24.4 22.7

Exhibit 5: Operating margins increased to 20.8%


180 160 140 120 100 80 60 40 20 3.0 4QCY11 1QCY12 2QCY12 3QCY12 4QCY12 1QCY13 2QCY13 Operating Profit Operating Margins (RHS) 4.6 8.0 10.8 16.4 14.5 20.8 23.0 18.0 13.0

( ` /scm)

( ` cr)

20.0 15.0 10.0 5.0 0.0 2.3

10.6

3.9

4.6

6.1

5.7

4QCY11 1QCY12 2QCY12 3QCY12 4QCY12 1QCY13 2QCY13 Avg. blended margin Avg. gas cost

Source: Company, Angel Research

Source: Company, Angel Research

Exhibit 6: Net Profit increased by 91.1% yoy


120 100 80 (10.9) (44.8) (69.7) (7.1) 24.8 181.9 91.1 200.0 180.0 160.0 140.0 120.0 100.0 80.0 60.0 40.0 20.0 (20.0) (40.0) (60.0) (80.0) (100.0)

(` cr)

40 20 -

4QCY11 1QCY12 2QCY12 3QCY12 4QCY12 1QCY13 2QCY13 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.

August 10, 2013

(%)

60

(%)

9.4

Gujarat Gas | 2QCY2013 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 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 8.6x and 8.4x 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 990 33.0 26.5

CY2014E 1,029 33.2 26.7

Exhibit 8: Angel EPS forecast vs consensus


Angel Forecast CY2013E CY2014E
Source: Company, Angel Research

Bloomberg Consensus

Variation (%) 1.5 2.2

22.6 23.1

22.3 22.6

Exhibit 9: One-year forward P/E


500 450 400 350 300 250 200 150 100 50 0

(` )

Feb-08

Feb-09

Feb-10

Feb-11

Feb-12

Nov-08

Nov-09

Nov-10

Nov-11

May-08

May-09

May-10

May-11

May-12

Nov-12

Feb-13

May-13

Aug-08

Aug-09

Aug-10

Aug-11

Aug-12

7x
Source: Company, Angel Research

10x

13x

16x

19x

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Aug-13

Gujarat Gas | 2QCY2013 Result Update

Exhibit 10: Recommendation summary


Company GGAS PLNG CMP (`) 195 118 264 TP (`) 167 Neutral Buy Neutral Reco. Mcap (` cr) 2,498 8,853 3,693 42 Upside 8.6 7.9 9.9 P/E (x) 8.4 7.0 8.7 4.5 P/BV (x) 2.3 1.7 2.1 0.8 2.0 1.4 1.7 0.7 EV/EBITDA (x) 4.7 4.8 4.6 2.1 4.0 4.2 3.8 1.6 RoE (%) 28.2 22.9 22.7 17.3 25.6 21.5 21.8 16.8 RoCE (%) 25.0 21.6 26.6 19.1 23.3 22.9 27.8 19.1 (%) CY13E CY14E CY13E CY14E CY13E CY14E CY13E CY14E CY13E CY14E

IGL

51 68 Buy 2,886 33 5.1 GSPL *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 group 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.

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Gujarat Gas | 2QCY2013 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 CY09 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 CY10 1,849 30.3 1,432 1,286 97 50 (2) 418 49.4 22.6 54 363 56.5 19.7 0 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 CY11 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 21.3 5.7 CY12 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 CY13E 3,316 7.1 2,892 2,626 56 76 134 424 3.7 12.8 76 348 1.6 10.5 1 69 16.5 416 1.9 416 125 30.0 291 1 290 290 1.3 8.7 22.6 22.6 1.3 CY14E 3,460 4.3 3,023 2,745 56 80 142 437 3.1 12.6 82 355 2.0 10.3 1 70 16.6 424 2.1 424 127 30.0 297 1 296 296 2.1 8.5 23.1 23.1 2.1

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Gujarat Gas | 2QCY2013 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 Long term provisions Other Long term liabilities Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Long term loans & Advances Other Non-current assets Investments Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 448 179 8 26 145 348 (168) 0 996 583 188 9 19 159 405 (217) 1,140 914 333 581 136 1,019 383 636 138 1,108 445 664 126 37 1 501 244 14 21 209 429 (185) 1,143 1,291 502 789 113 20 1 387 270 42 8 220 249 22 1,331 1,402 578 824 132 20 1 387 413 98 29 286 319 93 1,457 20 1 387 723 364 30 329 546 177 1,589 1,513 659 853 151 996 1,140 28 14 738 780 5 155 56 29 14 815 859 6 207 67 30 14 758 803 7 74 5 254 1,143 29 937 965 9 88 269 1,331 29 1,061 1,090 11 88 269 1,457 29 1,192 1,220 12 88 269 1,589 CY09 CY10 CY11 CY12 CY13E CY14E

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Gujarat Gas | 2QCY2013 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 CY09 259 47 (30) (21) (78) 178 (152) (63) 18 (197) 28 (24) 4 (15) 22 8 CY10 383 54 (15) (14) (124) 285 (112) (123) 21 (215) 52 (121) (69) 1 8 9 CY11 393 60 6 (44) (111) 304 (111) 53 38 (20) 49 (328) (279) 5 9 14 CY12 409 66 (12) (27) (107) 330 (167) 123 27 (18) (14) 14 (284) (284) 28 14 42 CY13E 416 76 (15) (69) (125) 282 (130) 69 (61) (165) (165) 56 42 98 CY14E 424 82 182 (70) (127) 490 (130) 70 (60) (165) (165) 265 98 364

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Gujarat Gas | 2QCY2013 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 (0.4) (1.0) 216.8 (0.4) (1.1) 347.9 (0.6) (1.7) 354.9 1.7 5 27 62 (34) 1.9 3 25 52 (40) 2.3 2 23 30 (32) 2.6 2 21 15 (13) 2.5 3 23 17 (1) 2.4 2 26 34 (0) 24.4 29.0 23.6 33.8 39.2 32.0 29.5 33.8 33.4 27.7 31.4 32.6 25.0 29.0 28.2 23.3 57.9 25.6 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 20.8 20.8 11.1 70.3 2.6 19.9 19.9 10.5 70.0 2.5 18.4 18.4 10.3 70.0 5.1 36.6 36.6 13.6 13.6 17.3 8.0 59.7 20.1 20.1 24.3 12.0 65.9 21.2 21.3 25.9 10.0 61.5 22.3 22.3 27.4 10.0 75.3 22.6 22.6 28.5 11.0 85.0 23.1 23.1 29.4 11.0 95.2 14.3 11.3 3.3 4.1 1.5 7.4 2.1 9.7 8.0 3.0 6.2 1.0 4.7 1.7 9.2 7.5 3.2 5.1 0.8 5.0 1.7 8.7 7.1 2.6 5.1 0.7 5.1 1.6 8.6 6.8 2.3 5.6 0.6 4.7 1.4 8.4 6.6 2.0 5.6 0.5 4.0 1.1 CY09 CY10 CY11 CY12 CY13E CY14E

Interest Coverage (EBIT/Int.) 1,706.9

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Gujarat Gas | 2QCY2013 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Pvt. Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Pvt. Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Pvt. Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Pvt. Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Pvt. Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Pvt. Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Pvt. Limited and its affiliates may have investment positions in the stocks recommended in this report.

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%)

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