Stock pick of the week: Why analysts are bullish on Gujarat Gas Ltd
, ET Bureau|
Dec 18, 2017, 06.30 AM IST
Gujarat Gas, India’s largest city gas distribution company, reported lacklustre numbers for the second quarter of 2017-18. While its revenue growth moderated to 13% year on year, net profit fell 15%.
Revenue growth was impacted by the moderation in sales volume due to several one-time factors including strikes by a section of the textile and ceramic industries against the implementation of the GST and flood in Gujarat. The fall in net profit was due to the fall in margins and the one-time payment of Rs 7 crore to the Chief Minister’s Relief Fund, pushing up the company’s expenses.
Analysts believe that the pressure on margin is a short-term phenomenon. For instance, there was no immediate price revision by the company to make up for the increase in LNG prices in the second quarter. However, it passed on the burden through price hikes in October, and so the margin pressure should ease in the third quarter.
Since Gujarat elections are over, the company is expected to go for further price hikes from January. To protect its margins, Gujarat Gas usually passes on the price impact—rise and fall—to consumers, and this is why its margin are expected to remain stable in the long term, though they can be volatile in the short term. Gujarat Gas has strong pricing power due to higher costs for alternative fuels such as oil.
The company’s long-term growth story, triggered by volume growth, also remains intact. This is because natural gas is much less polluting and, therefore, is likely to be the preferred fuel in the future. Besides industrial demand, natural gas usage is widespread among retail consumers by way of compressed natural gas (CNG) cylinders for vehicles and piped natural gas (PNG) for residential consumptions.
Gujarat Gas is expanding to benefit from a structural shift in the market and has already secured city gas distribution (CCD) licences for more district in Gujarat—a total 19 districts in the state now—Dadra and Nagar Haveli, and in Thane and Palghar districts in Maharashtra.
It has started operations in areas like Botad, Bhavnagar, and Jamnagar in the second quarter. While areas like Dahej, Silvassa, Kutch, and Halol will add to the volumes from the third quarter, sales from rural Thane are also expected to be factored in from the fourth quarter.
With expansion plans nearing completion, the firm’s capex intensity is coming down helping it improve free cash flows further to Rs 200 crore in 2017-18, which can be used to reduce debt. Net debt-equity is expected to come down from 1.3 in 2016-17 to 0.7 in 2018-19.
Analysts’ views
Buy: 15
Hold: 3
Sell: 4
Performance of Guajarat Gas compared with the Sensex. Stock price and index values normalised to a base of 100. Source: ETIG Database & Bloomberg
Selection Methodology
We pick the stock that has shown the maximum increase in ‘consensus analyst rating’ in the past one month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search is restricted to stocks that are covered by at least 10 analysts.
Revenue growth was impacted by the moderation in sales volume due to several one-time factors including strikes by a section of the textile and ceramic industries against the implementation of the GST and flood in Gujarat. The fall in net profit was due to the fall in margins and the one-time payment of Rs 7 crore to the Chief Minister’s Relief Fund, pushing up the company’s expenses.
Analysts believe that the pressure on margin is a short-term phenomenon. For instance, there was no immediate price revision by the company to make up for the increase in LNG prices in the second quarter. However, it passed on the burden through price hikes in October, and so the margin pressure should ease in the third quarter.
Since Gujarat elections are over, the company is expected to go for further price hikes from January. To protect its margins, Gujarat Gas usually passes on the price impact—rise and fall—to consumers, and this is why its margin are expected to remain stable in the long term, though they can be volatile in the short term. Gujarat Gas has strong pricing power due to higher costs for alternative fuels such as oil.
The company’s long-term growth story, triggered by volume growth, also remains intact. This is because natural gas is much less polluting and, therefore, is likely to be the preferred fuel in the future. Besides industrial demand, natural gas usage is widespread among retail consumers by way of compressed natural gas (CNG) cylinders for vehicles and piped natural gas (PNG) for residential consumptions.
Gujarat Gas is expanding to benefit from a structural shift in the market and has already secured city gas distribution (CCD) licences for more district in Gujarat—a total 19 districts in the state now—Dadra and Nagar Haveli, and in Thane and Palghar districts in Maharashtra.
It has started operations in areas like Botad, Bhavnagar, and Jamnagar in the second quarter. While areas like Dahej, Silvassa, Kutch, and Halol will add to the volumes from the third quarter, sales from rural Thane are also expected to be factored in from the fourth quarter.
With expansion plans nearing completion, the firm’s capex intensity is coming down helping it improve free cash flows further to Rs 200 crore in 2017-18, which can be used to reduce debt. Net debt-equity is expected to come down from 1.3 in 2016-17 to 0.7 in 2018-19.
Analysts’ views
Buy: 15
Hold: 3
Sell: 4
Performance of Guajarat Gas compared with the Sensex. Stock price and index values normalised to a base of 100. Source: ETIG Database & Bloomberg
Selection Methodology
We pick the stock that has shown the maximum increase in ‘consensus analyst rating’ in the past one month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search is restricted to stocks that are covered by at least 10 analysts.
