About
Gujarat gas is a gas distribution company with a distribution network in south gujarat in cities such as surat, vapi, ankleshwar etc.

Gujarat gas supplies natural gas to Industrial, commerical and domestic customer in the above areas and has been expanding into CNG distribution in the same cities.

I have written on gujarat gas earlier here and uploaded a detailed analysis here

Performance 2008
The company reported a topline growth of around 7% and bottom line growth of around 5% inspite of volume de-growth due to supply shortage of gas.

The profitability numbers such as net profit margin has been maintained at 11.9%, ROE at 20%+ and the company continues to hold almost 360 Crs of cash on its books.

Q109 performance
The company had drop of around 20% in profit due to serious shortages of Gas again. It seems GAIL (their main supplier) has not been supplying as per earlier contract due to certain ‘Force majeure event’ (unforseen event). Due to the drop in volumes supplied, the company had a drop in topline and bottom line.

The company is now working to contract additional sources of gas to meet the expanding demand.

Attractive business model
As I have noted earlier on my blog, Gujarat gas has a very attractive business model. The company on account of its distribution network has a kind of  monopoly in the areas it operates (Not a true monopoly as other companies can come in, but are not likely to). As a result the company, within the constraints of its contracts, can pass cost increases to its customers.

In addition, gujarat gas has free cash flow which greater than the net profits. This is due to the fact that the company can charge a deposit from a customer and gets to retain this money as long as it keeps the customer. In a growing business, this is an additional source of cash (interest free loan) which the company can use to expand the business.

The company has a negative working capital position which continues to expand with the growth in the business. Companies like Lakshmi machine works (LMW) are able to generate cash from customer deposits and FMCG companies like levers etc have operated with negative working capital. Gujarat gas has a unique business model where is it able to generate additional cash flows from these two sources in addition to its own profit stream.

As a result of the above cash flow, the company can fund its own growth based on the money received from customers and suppliers

Looking forward
Gas is a supply constrained commodity and compares well with alternative sources of fuel. With the new gas finds coming online, gujarat gas should benefit and should be able to meet the demand of its customers.

In addition the company is expanding into new areas such dahej, hojiwala etc. These new markets and the growth in the existing markets should drive the topline and bottom line of the company.
 
Management
I have been following the company since 2003 and have found the management to be shareholder friendly. The management compensation seems to be fair. Although Gujarat gas is a subsidiary of BG (british gas), I have not seen any attempts till date on part of BG to cheat the minority shareholders (although one can never be 100% sure).

The management has executed extremely well in the last few years. They have transitioned well from a controlled gas pricing model (GAIL was the supplier and the price was below market rate) to an open market pricing model. In addition, the company has also been able to reduce the impact of the loss of transmission income and expand into new areas such as CNG distribution.

The management has been a good allocator of capital in the past as it has invested in the business at high rates of return and been able to expand the business while maintaining the profitability levels.

Disclosure : I hold the stock.

4 Comments

  1. perspicacious says:

    Sir, do you think -Indraprastha Gas might be a superior holding compared to Gujarat Gas.
    Pluses
    -It is debt free and has a near monopoly on CNG
    -The per unit cost of distribution will be lower for it as compared to Guj Gas because it serves a small dense area i.e. delhi vs Gujarat
    -The Commonwealth Games should act as a catalyst (hopefully in Delhi area)
    -Increasing number of private models in CNG e.g. Chevrolet Spark and Maruti Omni’s Van
    Some Risks
    -Indraprastha margins have gone to sub 20% levels since last 2 quarters
    -Private parties may decide to compete against Indraprastha eroding margins further, though they will take minimum of 3-5 years to scale up
    -Indraprastha Gas distribution in Noida will depend on Madam Mayawati’s mood, if you google it was stuck because UP govt did not want to give it right of way.
    -It will not grow as fast as Guj Gas unless it expands faster in NCR area

  2. stocks2pick says:

    Sir,
    I have been going through few of your company analysis and found them very comprehensive with a good focus on profit,business model and sales.
    One thing that I have noticed is that all companies have a considerable market capitalization and has gone past from the growth phase to value phase.I would really appreciate to know is that if you would identify companies that are still in nascent stage of their growth phase and could be future multibaggers .

    Keep up the good work.Really appreciate it.

    God Bless.

  3. admin says:

    Hi perspicacious
    i think you have summarized the comparison well. I have done a similar comparison and decided to exit due to the reasons outlined in this post

    http://blog.rcfunds.com/?p=192

  4. admin says:

    Hi stocks2pick
    i discuss all my ideas on the blog itself. i dont have any other ideas which could be multibaggers in the near future
    regards
    rohit

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