Recommendation from Oil Drilling And Exploration

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year. 

GUJARAT GAS : PIPING UP PROFITS 

HERE IS WHY 
☛Strong market position. 
☛Good growth prospects. 
☛Robust year-on-year growth. 

Gujarat Gas Limited (GGL) is one of India’s largest city gas distribution players. It has presence spread across 23 districts in the state of Gujarat, Union Territory of Dadra and Nagar Haveli and Thane geographical area (excluding already authorised areas) which includes Palghar district of Maharashtra. The company boasts of having India’s largest customer base in residential, commercial and industrial segments with more than 24,000 km of gas pipeline network. It has more than 400 CNG stations and distributes natural gas to over 14,50,000 households and to more than 3,700 industrial customers.

The company has witnessed significant volume growth in industrial customers in FY20 compared to the previous year. The volume increase was mainly on account of a ban on the usage of coal gasifier in the Morbi industrial cluster, thereby resulting in switchover to natural gas. This will improve the revenue visibility for GGL in the coming few years. The company has continued its focused efforts for developing and growing PNG (domestic) and CNG business. It has been able to sustain the volumes with growth in the residential sector and in CNG (transport) sector. It is also aggressively planning for penetration in PNG (domestic), PNG (commercial) and CNG (transport) sector which is comparatively less volatile. 

At present, natural gas accounts for just about 6 per cent in the total energy mix of the country due to its low per capita consumption. The government is aiming to increase this share and wants to take it to 15 per cent by 2030. This can translate into 150 per cent increase in revenue for natural gas players. Moreover, with favourable government policies and reforms, the per capita consumption of natural gas is expected to also rise. Hence, the demand side will be strong. There is also a growing preference for natural gas for its convenience, safety and cost-effective properties. 

The company has shown good growth in the past. Net sales in FY20 stood at Rs 10,300 crore as against Rs 6,174 crore in FY18. The operating profit has also shown an increase in the same period. Operating profit for FY20 stood at Rs 1,730.94 crore as against Rs 941.04 crore in FY18. PAT for FY20 stood at Rs 1,198 crore as against Rs 291.19 crore in FY18. For the quarter ended June 2020, the company’s gross sales decreased by 58.54 per cent to Rs 1,107.36 crore in Q1FY21 from Rs 2,670.82 crore in Q1FY20. Operating profit showed a decrease of 58.97 per cent to Rs 200.66 crore in Q1FY21 from Rs 489.04 crore in the same quarter last year. 

The PBIDT margin for Q1FY21 stood at 18.12 per cent as against 18.31 per cent in the same quarter last year. The company’s net profit for Q1FY21 stood at Rs 58.68 crore as against Rs 233.68 crore in the same quarter last year, showing a decrease of 74.89 per cent. PAT margin for Q1FY21 stood at 5.30 per cent as against 8.75 per cent in the same quarter last year. ROCE for FY20 stood at 29.03 per cent as against 18.62 per cent for FY19 respectively. The company is trading at PE ratio of 19.70x, which is lower than its 10-year median of 30.31x. The current PB is 5.97x, which is near the 10-year median of 5.36x. By virtue of these factors, our recommendation to readerinvestors is to BUY this stock.