Gujarat Gas: Cost boost

Gas transmission companies such as Gujarat Gas are likely to see a reduction in their operating costs by nearly 10 per cent with the government awarding infrastructure status to gas pipeline and allied infrastructure in the budget. The company is expected to pass on lower operational costs to consumers, going forward.

Meanwhile, Gujarat Gas' consolidated operating profit grew 23.2 per cent y-o-y to Rs 33.5 crore in the December 2006 quarter compared with 36.6 per cent growth in its income from operations to Rs 273.59 crore. Operating profit margin also declined 140 basis points y-o-y to 12.2 per cent in the last quarter.

This pressure on margins was owing to raw material costs as a percentage of income from operations jumping 410 basis points to 78 per cent in the last quarter.

Analysts point out that higher prices of gas were not fully passed on to consumers in the last quarter. However, it has effected price hikes in Q4 FY07. These hikes are expected to improve operating margins, going forward.

Last quarter, the volume of gas transported surged 40.1 per cent y-o-y, thanks to strong demand from residential and CNG segments. For CY06 also, operating profit margin declined 430 basis points y-o-y to 15.4 per cent.

However, the results for CY06 are not strictly comparable with a year earlier, given its acquisition of the co-generation business of BG India Energy Services with effect from June 2006. The Gujarat Gas stock trades at 14.7 times estimated CY07 earnings and leaves little room for further upside.