3QCY2011 Result Update | Oil & Gas

November 3, 2011

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

NEUTRAL
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Oil & Gas 5,690 0.5 463/310 10583 2 17,482 5,266 GGAS.BO GUJS@IN
507 90 17.8 56 28.7 30.4 23bp 41.5 585 140 24.0 96 11.6 (16.1) (594)bp (16.9)

`444 -

3QCY11 3QCY10 % chg (yoy) 2QCY11 % chg (qoq) 653 118 18.0 80

For 3QCY2011, Gujarat Gas (GGAS) reported a good performance on the revenue, EBITDA and PAT front. Growth during the quarter was led by higher realization. We remain Neutral on the stock. Higher realization drives top-line growth: For 3QCY2011, GGAS reported top-line growth of 28.7% yoy to `653cr mainly on account of higher realization. Average sales realization stood at `19.7/scm (up 24.7% yoy), driven by hike in selling prices of the industrial retail and CNG segments. Other income boosts net profit growth: Cost of goods sold during the quarter increased by 28.8% yoy to `490cr on account of higher proportion of expensive RLNG sales coupled with INR depreciation against the USD. Hence, the companys EBITDA grew by 30.4% yoy (in-line with net sales growth) to `118cr. Other income during the quarter grew by 100.9% yoy to `10cr. Consequently, the companys net profit grew by 41.5% yoy to `80cr. Outlook and valuation: GGAS still awaits authorization 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. At current levels, the stock is trading at 17.8x and 15.9x CY2011E and CY2012E earnings, respectively. We believe the stock is fairly valued at current levels and, hence, maintain our Neutral stance on the stock. 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

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 65.1 7.6 16.1 11.2

Abs. (%) Sensex GGAS

3m 8.1

1yr 14.7

3yr 69.1 323.4

(2.6) (14.6)

CY2009 1,420 9.1 174 8.4 19.7 13.6 32.7 7.4 23.6 24.4 3.7 18.8

CY2010 1,849 30.3 258 48.0 22.5 20.1 22.1 6.7 32.0 33.8 2.8 12.3

CY2011E 2,472 33.7 319 23.9 19.3 24.9 17.8 5.6 34.4 34.2 2.1 10.7

CY2012E 2,908 17.7 359 12.4 18.6 28.0 15.9 4.7 32.1 33.6 1.7 9.1

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

Please refer to important disclosures at the end of this report

Gujarat Gas | 3QCY2011 Result Update

Exhibit 1: 3QCY2011 performance

Y/E December (` 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

3QCY11 3QCY10 % chg (yoy) 2QCY11 % chg (qoq) 653 490 535 118 18.0 10 15 0 113 17.2 33 28.9 80 80 12.2 507 381 417 90 17.8 5 14 0 82 16.1 25 30.7 57 56 11.1 41.7 127.9 41.5 30.0 100.9 10.0 0.0 38.1 28.7 28.8 28.4 30.4 585 399 445 140 24.0 14 15 0 139 23.8 43 30.9 96 96 16.4 (16.8) (16.9) (24.6) (29.9) 1.8 (89.4) (19.2) 11.6 22.7 20.3 (16.1)

Top-line growth of 28.7% yoy driven by higher realization: The companys top line
increased by 28.7% yoy to `653cr mainly on account of higher realization. Average sales realization grew by 24.7% yoy to `19.7/scm, led by hike in selling prices of the industrial retail and CNG segments. Natural gas volume sold grew by 3.5% yoy to 326mmscm during the quarter.

Exhibit 2: Realization increases by 24.7% yoy...

330 320 310 16.3 16.8 19.1 19.7 20.0 30.0

Exhibit 3: ...leading to top-line growth of 28.7% yoy

700 600 500 33.8 23.4 30.7 33.0 29.0 28.7 39.8 44.0 40.0 36.0 32.0 28.0 24.0 20.0 16.0 12.0 8.0 4.0 -

(mmscm)

13.5

290 280 270 1QCY10 3QCY10 Gas volumes 1QCY11 3QCY11 Avg realisation (RHS)

10.0

300 200 100

1QCY10 3QCY10 Operating revenues

1QCY11 3QCY11 Operating revenues growth (RHS)

Source: Company, Angel Research

Source: Company, Angel Research

November 3, 2011

(%)

300

13.8

(` cr)

16.5

(`/scm

400

Gujarat Gas | 3QCY2011 Result Update

Other income boosts net profit growth: Cost of goods sold during the quarter increased
by 28.8% yoy to `490cr on account of higher proportion of expensive RLNG sales coupled with INR depreciation against the USD. Hence, EBITDA grew by 30.4% yoy (in-line with net sales growth) to `118cr. Other income grew by 100.9% yoy to `10cr. Consequently, the companys net profit grew by 41.5% yoy to `80cr.

Exhibit 4: Average cost and margin trend

25.0 20.0 15.0 10.0 5.0 0.0 1QCY10 2QCY10 3QCY10 4QCY10 1QCY11 2QCY11 3QCY11 Avg. blended margin Avg. gas cost

Exhibit 5: Operating profit trend

160 140 120 100 25.0 25.2 24.0 22.3 20.6 18.0 17.8 17.0 15.0 1QCY10 2QCY10 3QCY10 4QCY10 1QCY11 2QCY11 3QCY11 Operating Profit Operating Margins (RHS) 27.0 25.0 23.0

(`/scm)

(` cr)

60 40 20 -

19.0

Source: Company, Angel Research

Source: Company, Angel Research

Exhibit 6: PAT growth trend

120 100 80 70.1 79.0 67.7 90.0 80.0 70.0 60.0 41.5 27.2 50.0 40.0 21.7 16.9 30.0 20.0 10.0 1QCY10 2QCY10 3QCY10 4QCY10 1QCY11 2QCY11 3QCY11
PAT PAT growth (RHS)

(` cr)

60 40 20 -

Source: Company, Angel Research

November 3, 2011

(%)

(%)

80

21.0

Gujarat Gas | 3QCY2011 Result Update

Investment arguments
RLNG to drive volume growth: 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. The company re-entered into a firm RLNG agreement with BG for total supply of 1.1mmscmd. The company continues to explore such long-term RLNG contracts. Moreover, increased availability of domestic gas (RIL, along with BP, ramping up production from KG-D6 beyond 45mmscmd) would improve matters further. Gross spread to stabilize: The company's profitability has been improving with its focus shifting to the high-margin retail business from bulk customers. Going ahead, we expect gross gas spread to stabilize at the current level as the company is able to pass through its gas cost to customers by proactively pricing it, taking into account the pricing of alternative fuels. Outlook and valuation GGAS still awaits authorization 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 its volume growth and margins going ahead. At current levels, the stock is trading at 17.8x and 15.9x CY2011E and CY2012E earnings, respectively. We believe the stock is fairly valued at current levels and, hence, maintain our Neutral recommendation on the stock.

Exhibit 7: Key assumptions

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

CY2011E 1,341 18.5 13.3

CY2012E 1,463 19.6 14.2

Exhibit 8: Angel EPS forecast vs. consensus

Angel Forecast CY2011E CY2012E
Source: Company, Angel Research

Bloomberg Consensus 25.7 27.8

Variation (%) (3.1) 0.7

24.9 28.0

November 3, 2011

Gujarat Gas | 3QCY2011 Result Update

Exhibit 9: One-year forward P/E

600 500

Share price (`)

400 300 200 100 0

Oct-06

Oct-07

Oct-08

Oct-09

Oct-10

7x
Source: Company, Angel Research

10x

13x

16x

19x

Exhibit 10: Recommendation summary

Company GGAS* IGL GSPL Petronet CMP (`) 444 418 102 166 TP (`) 117 Neutral Neutral Buy Neutral Reco. Mcap (` cr) 5,690 5,856 5,727 12,472 Upside (%) 15 P/E (x) FY12E 17.8 16.8 10.0 12.1 FY13E 15.9 15.3 9.2 12.0 P/BV (x) FY12E 5.6 4.6 2.3 3.5 FY13E 4.7 3.7 1.9 2.8 EV/EBITDA (x) FY12E 10.7 8.9 6.4 7.9 FY13E 9.1 8.0 5.7 7.2 RoE (%) FY12E 34.4 30.6 25.6 33.1 FY13E 32.1 26.8 22.7 26.1 RoCE (%) FY12E FY13E 34.2 35.7 23.5 23.7 33.6 33.5 22.3 20.4

Source: Angel Research; Note: For GGAS* FY12E = CY11E and FY13E = CY12E

November 3, 2011

Oct-11

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Apr-08

Apr-09

Apr-10

Apr-11

Apr-06

Apr-07

Jul-06

Jul-07

Jul-08

Jul-09

Jul-10

Jul-11

Gujarat Gas | 3QCY2011 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 CY07 1,229 15.1 1,214 31 1,246 28.5 993 879 12 31 71 251 68.3 20.2 38 213 81.3 17.1 17 7.6 230 75.3 230 77 33.3 154 1 153 153 74.6 12.3 11.9 11.9 74.6 CY08 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 41 17.6 235 1.9 235 73 31.1 162 1 161 161 5.0 12.3 12.5 12.5 5.0 CY09 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 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 1,842 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 22 5.8 383 48.2 383 124 32.4 259 1 258 258 48.0 13.9 20.1 20.1 48.0 CY11E 2,472 38.1 2,434 38 2,472 33.7 1,994 1,779 37 74 104 477 14.8 19.3 60 417 15.4 16.9 1 47 10.1 463 20.8 463 142 30.7 321 2 319 319 23.9 12.9 24.9 24.9 23.9 CY12E 2,914 44.9 2,869 39 2,908 17.7 2,368 2,118 43 84 123 540 13.1 18.6 67 473 13.3 16.3 1 49 9.4 521 12.4 521 160 30.7 361 2 359 359 12.4 12.3 28.0 28.0 12.4

November 3, 2011

Gujarat Gas | 3QCY2011 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 710 248 462 111 235 166 18 34 115 228 (62) 2 748 767 285 482 134 356 175 22 25 128 241 (66) 906 914 333 581 136 448 179 8 26 145 348 (168) 996 1,019 383 636 130 583 196 9 19 167 405 (209) 1,140 1,134 443 691 160 583 373 44 52 277 511 (138) 1,296 1,244 511 734 180 583 596 221 58 317 572 24 1,521 13 14 560 588 4 112 45 748 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 29 14 983 1,027 8 179 82 1,296 29 14 1,191 1,235 10 195 82 1,521 CY07 CY08 CY09 CY10 CY11E CY12E

November 3, 2011

Gujarat Gas | 3QCY2011 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 CY07 230 38 5 (13) (73) 187 (92) (109) 13 (187) 22 (20) 1 1 16 18 CY08 235 42 12 (25) (57) 206 (90) (126) 23 (192) 15 (24) (9) 5 18 22 CY09 259 47 (30) (21) (78) 178 (152) (63) 18 (197) 28 (24) 4 (15) 22 8 CY10 383 54 9 (22) (118) 306 (135) (125) 22 (238) 2 52 (121) (67) 1 8 9 CY11E 463 60 (22) (47) (142) 312 (145) 47 (98) (28) (151) (179) 35 9 44 CY12E 521 67 15 (49) (160) 394 (130) 49 (81) 15 (151) (136) 177 44 221

November 3, 2011

Gujarat Gas | 3QCY2011 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) Working capital cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT/Interest) (0.4) (1.0) (0.5) (1.6) (0.6) (1.5) (0.7) (1.3) (0.6) (1.2) 463.4 (0.6) (1.4) 472.7 1.9 5 25 66 (24) 1.8 5 26 63 (24) 1.7 5 27 62 (34) 1.9 4 25 48 (39) 2.3 4 26 49 (30) 2.4 5 29 59 (24) 31.7 39.0 30.2 23.4 28.3 25.1 24.4 29.0 23.6 33.8 39.0 32.0 34.2 39.9 34.4 33.6 42.7 32.1 17.1 67.1 1.9 21.8 21.8 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 16.9 69.3 2.1 24.3 24.3 16.3 69.3 2.3 25.7 25.7 11.9 11.9 14.9 1.5 44.5 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 24.9 24.9 29.6 10.0 79.0 28.0 28.0 33.2 10.0 95.2 37.2 29.7 10.0 0.3 2.1 10.3 3.5 35.4 28.1 8.0 0.3 1.9 10.5 2.7 32.7 25.7 7.4 1.8 3.7 18.8 5.3 22.1 18.2 6.7 2.7 2.8 12.3 4.5 17.8 15.0 5.6 2.3 2.1 10.7 3.9 15.9 13.4 4.7 2.3 1.7 9.1 3.2 CY07 CY08 CY09 CY10 CY11E CY12E

2,008.0 1,742.7 1,706.9 782.3

November 3, 2011

Gujarat Gas | 3QCY2011 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 3, 2011

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