1QCY2011 Result Update | Oil & Gas

May 9, 2011

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

BUY
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 4,605 0.7 454/260 8750 2 18,529 5,551 GGAS.BO GUJS@IN
514 129 25.2 82 3.0 (15.9) 463bp (12.2) 410 103 25.0 62 29.0 6.1 445bp 16.9

`359 `418
12 Months

1QCY11 4QCY10 % chg (qoq) 1QCY10 % chg (yoy) 529 109 20.6 72

Gujarat Gass (GGAS) 1QCY2011 PAT declined by 12.2% qoq to `72cr (`82cr) on lower gross spread. However, on a yoy basis, PAT grew by robust 16.9% during the quarter. We recommend Buy on the stock. Gross spread cools off sequentially on higher LNG price: For 1QCY2011, GGAS reported top-line growth of 29% yoy to `529cr (`410cr). Average realisations increased to `17.2/scm (`13.8/scm) during the quarter. Gross gas spread stood higher on a yoy basis. However, it cooled off sequentially to `4.6/scm (`5.4/scm) on account of higher cost of LNG procured to meet the companys gas requirements. Outlook and valuation: GGASs volumes during the quarter were supported by higher gas flow from RLNG, following lower supply from the PMT field. Thus, reliance on RLNG increased to support the companys volume growth. The company has also entered into a firm contract with British Gas (BG) to meet its growth requirements. The company continues to explore entering into such long-term RLNG contracts and, thus, soften supply-side constraints. Besides volume growth, to maintain margins, the company plans to price its gas to its various consumers, taking into consideration the pricing of alternative fuels. We believe through this strategy, the company will be able to maintain its volume growth and margins going ahead. Thus, we recommend Buy on the stock with a target price of `418. 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 9.4 16.0 9.5

Abs. (%) Sensex GGAS

3m 2.7 10.0

1yr 6.9 26.1

3yr 8.5 163.7

CY2009 1,420 9.1 174.2 8.4 19.7 13.6 26.4 6.0 23.6 24.4 2.9 14.9

CY2010 1,849 30.3 257.7 48.0 22.5 20.1 17.9 5.5 32.0 33.8 2.2 9.7

CY2011E 2,122 14.7 267.8 3.9 20.8 20.9 17.2 4.8 29.7 31.9 1.9 9.1

CY2012E 2,438 14.9 297.5 11.1 19.9 23.2 15.5 4.2 28.8 31.5 1.6 8.1

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

Amit Vora
Tel: 022 - 3935 7800 Ext: 6827 amit.vora@angelbroking.com

Please refer to important disclosures at the end of this report

Gujarat Gas | 1QCY2011 Result Update

Exhibit 1: 1QCY2011 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

1QCY11 529 380 40 109 20.6 10 15 0 104 19.7 32 30.7 72 0 72 13.6

4QCY10 514 338 46 129 25.2 8 14 0 123 23.9 40 32.8 83 0 82 16.0

% chg (qoq) 3.0 12.3 (12.0) (15.9) 31.0 2.1 (51.4) (15.0) (20.4) (12.4) (43.8) (12.2)

1QCY10 410 277 30 103 25.0 4 13 0 94 22.8 32 33.8 62 0 62 15.0

% chg (yoy) 29.0 36.9 34.5 6.1 156.0 13.0 8.4 11.5 1.3 16.6 (31.3) 16.9

CY10 1849 1286 147 416 22.5 22 54 0 383 20.7 124 32.4 259 1 258 13.9

CY09 1420 1003 137 280 19.7 27 47 0 259 18.2 84 32.3 175 1 174 12.3

% chg (yoy) 30.3 28.2 7.5 48.7 (15.9) 14.4 238.7 48.2 48.7 48.0 48.4 48.0

Top line up 29% driven by higher realisation: For 1QCY2011, GGAS reported top-line growth of 29% yoy to `529cr (`410cr), driven by an increase in average realisations to `17.2/scm (`13.8/scm) during the quarter. Average realisation came in higher due to the price hike taken for all consumers over the last one year. Realisation also increased sequentially due to full effect of the price hike taken for industrial retail customers in the previous quarter and price hike for CNG and PNG consumers taken during the quarter.

Exhibit 2: Operating revenue growth trend

600 500 400 33.8 23.4 30.7 33.0 29.0 36.0 32.0 28.0 24.0 16.0 12.0 8.0 4.0 1QCY10 2QCY10 3QCY10 4QCY10 1QCY11 20.0

(` cr)

200 100 -

Operating Revenues

Operating Revenues growth (RHS)

Source: Company, Angel Research

May 9, 2011

(%)

300

Gujarat Gas | 1QCY2011 Result Update

RLNG offtake increases sequentially: During the quarter, there was lower gas supply sequentially from the PMT field. Thus, reliance on LNG increased to support the companys growth. On a yoy basis also, gas distribution volumes grew by 4.1% on account of higher RLNG volume offtake to 303mmscm (291mmscm). More than 8,700 vehicles were converted to CNG during the quarter, taking the total number of CNG vehicles now plying on natural gas in the companys markets to more than 144,000. OPM contracts by 445bp yoy and 463bp qoq to 20.6% on higher LNG prices: Sequentially, the companys OPM contracted by 463bp to 20.6% (25.2%) mainly on account of the decrease in gross gas spread, which cooled off to `4.6/scm during the quarter, and base effect of higher revenue. Gross gas spread cooled off on account of increased cost of LNG procured during the quarter. Similarly, on a yoy basis, OPM contracted by 445bp. Operating expenditure during the quarter increased by 34.5% yoy to `40.4cr (`30.1cr), wherein staff costs increased by 31% yoy to `14.1cr (`10.7cr) and other operating expenditure increased by 36.4% yoy to `26.4cr (`19.3cr). Thus, margin contraction led to operating profit increasing at a lower rate of 6.1% yoy to `109cr (`103cr).

Exhibit 3: Operating performance trend

140 120 100 25.0 25.2 27.0 25.0 23.0 22.3

(` cr)

60 40 20 1QCY10 2QCY10
Operating Profit

19.0 17.8 17.0 15.0 3QCY10 4QCY10 1QCY11

Operating Margins (RHS)

Source: Company, Angel Research

Depreciation cost increases, interest cost flat: Depreciation cost increased by 13% yoy to `14.5cr (`12.8cr) due to investments in the pipeline network, CNG and other infrastructure during the year. Interest costs during the quarter were negligible as the company utilises internal cash accruals to meet its working capital requirements and for expansions. PAT increases by 16.9% yoy to `72cr: Other income increased by 156% yoy to `10.1cr (`4cr), while the effective tax rate stood lower at 30.7% (33.8%). Thus, the companys bottom line increased by 16.9% yoy to `72cr (`61cr), despite lower OPM.

May 9, 2011

(%)

80

20.6

21.0

Gujarat Gas | 1QCY2011 Result Update

Exhibit 4: PAT growth trend

90 80 70 60 70.1 79.0 90.0 80.0 70.0 60.0 40.0 21.7 27.2 16.9 30.0 20.0 10.0 1QCY10 2QCY10
PAT

(` cr)

40 30 20 10 3QCY10 4QCY10 1QCY11

PAT growth (RHS)

Source: Company, Angel Research

May 9, 2011

(%)

50

50.0

Gujarat Gas | 1QCY2011 Result Update

Investment arguments
Supply-side woes receding on improving domestic gas availability and LNG playing a crucial role: Over the last one year, the company registered steady growth in volumes, following improving availability of gas in the country and subdued RLNG prices. Although there have been some delays in receiving gas from KG-D6 on account of slow ramp-up of gas production, the company is ensuring that the shortfall in volume is compensated with higher RLNG procurement. The company recently re-entered into a firm RLNG agreement with BG for total supply of 1.2mmscmd. The company continues to explore entering such long-term RLNG contracts. Moreover, increased availability of domestic gas (RIL, along with BP, ramping up production from KG-D6 beyond 50mmscmd) would improve matters further. Gross spread to stabilise: Gross spread has edged higher over the last couple of years as the company provided large proportion of its incremental gas to the highmargin industrial retail customers. Thus, 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 stabilise 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

GGASs volumes during the quarter were supported by higher gas flow from RLNG, following lower supply from the PMT field. Thus, reliance on RLNG increased to support the companys volume growth. The company has also entered into a firm contract with BG to meet its growth requirements. The company continues to explore entering into such long-term RLNG contracts and, thus, soften supply-side constraints. The companys CNG segment has been reporting healthy growth and increasing its share in the volume matrix. The number of CNG vehicles now plying on natural gas in the companys markets totals over 144,000. GGAS still awaits authorisation 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. The same is currently under evaluation. Besides volume growth, to maintain margins, the company plans to price its gas to its various consumers, taking into consideration the pricing of alternative fuels. We believe, through this strategy, the company will be able to maintain volume growth and margins going ahead. At current levels, the stock is trading at 17.2x and 15.5x CY2011E and CY2012E earnings, respectively. We recommend Buy on the stock with a target price of `418, implying an upside of 16.4% from current levels.

May 9, 2011

Gujarat Gas | 1QCY2011 Result Update

Exhibit 5: Key assumptions

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

CY2011E 1,358 15.5 11.1

CY2012E 1,496 16.2 11.8

Exhibit 6: Angel EPS forecast vs. consensus

Angel Forecast CY2011E CY2012E
Source: Company, Angel Research

Bloomberg Consensus 22.4 25.4

Variation (%) (6.9) (8.6)

20.9 23.2

Exhibit 7: Recommendation summary

Company Cairn India GAIL Gujarat Gas ONGC Petronet LNG RIL Reco Neutral Buy Buy Buy Neutral Buy CMP (`) 343 457 359 304 133 958 Target Upside (%) Price (`) 1.7 539 418 356 1,189 18.0 16.4 17.1 4.2 24.1 Mkt Cap (` cr) 65,251 57,944 4,605 260,172 10,001 313,724 FY2013E P/BV (x) 1.2 2.2 4.2 1.7 2.5 1.4 FY2013E P/E (x) 7.7 12.8 15.5 10.0 11.5 12.4 FY2013E RoCE (%) 18.8 20.7 31.5 19.5 19.3 11.8 FY2013E RoE (%) 16.6 18.5 28.8 21.2 24.3 13.2

Source: Company, Angel Research

Exhibit 8: One-year forward P/E

500 400

Share Price (`)

300 200 100 -

Sep-05

Sep-06

Sep-07

Sep-08

Sep-09

May-05

May-06

May-07

May-08

May-09

May-10

Sep-10

Share Price

6x

9x

12x

15x

18x

Source: Company, Angel Research

May 9, 2011

May-11

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Gujarat Gas | 1QCY2011 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 1,214 31 1,245 28.5 993 879 12 31 71 251 68.3 20.2 38 213 81.3 17.1 0 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 1,274 27 1,301 4.5 1,066 934 16 41 75 235 (6.4) 18.1 42 193 (9.1) 14.9 0 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 22 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 0 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 29 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 0 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 2,116 33 2,084 38 2,122 14.7 1,680 1,513 31 55 81 442 6.2 20.8 62 379 4.9 17.9 1 25 6.2 403 5.2 403 134 33.2 269 2 268 268 3.9 12.6 20.9 20.9 3.9 CY12E 2,437 38 2,399 39 2,438 14.9 1,953 1,760 36 68 88 485 9.9 19.9 67 418 10.3 17.1 1 31 6.9 448 11.1 448 149 33.2 299 2 297 297 11.1 12.2 23.2 23.2 11.1

May 9, 2011

Gujarat Gas | 1QCY2011 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) 0 906 914 333 581 136 448 179 8 26 145 348 (168) 0 996 1,019 383 636 130 583 196 9 19 167 405 (209) 1,140 1,134 446 689 160 583 299 17 45 238 491 (192) 1,240 1,244 513 731 195 583 440 125 49 266 535 (95) 1,414 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 14 932 976 8 179 77 1,240 29 14 1,078 1,122 10 195 88 1,414 CY07 CY08 CY09 CY10 CY11E CY12E

May 9, 2011

Gujarat Gas | 1QCY2011 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 CY08 CY09 230 38 5 (13) (73) 187 (92) (109) 13 (187) 22 (20) 1 1 16 18 235 42 12 (25) (57) 206 (90) (126) 23 (192) 15 (24) (9) 5 18 22 259 47 (30) (21) (78) 178 (152) (63) 18 (197) 28 (24) 4 (15) 22 8 CY10 CY11E CY12E 383 54 9 (22) (118) 306 (135) (125) 22 (238) 2 52 (121) (67) 1 8 9 403 62 19 (25) (124) 336 (145) 25 (120) (28) (180) (208) 8 9 17 448 67 12 (31) (138) 358 (145) 31 (114) 15 (151) (136) 108 17 125

May 9, 2011

Gujarat Gas | 1QCY2011 Result Update

Key ratios
Y/E December (` cr) 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) 782 (0.6) (1.3) 421 (0.6) (1.4) 418 2 5 25 66 (24) 2 5 26 63 (24) 2 5 27 62 (34) 2 4 25 48 (39) 2 4 28 52 (37) 2 5 29 60 (32) 31.7 39.0 30.2 23.4 28.3 25.1 24.4 29.0 23.6 33.8 39.0 32.0 31.9 36.7 29.7 31.5 38.8 28.8 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 17.9 66.8 1.8 21.5 21.5 17.1 66.8 1.9 22.2 22.2 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 20.9 20.9 25.7 10.0 74.9 23.2 23.2 28.4 10.0 86.3 30.1 24.1 8.1 0.4 1.6 8.2 2.7 28.7 22.7 6.5 0.4 1.5 8.2 2.1 26.4 20.8 6.0 2.2 2.9 14.9 4.2 17.9 14.8 5.5 3.3 2.2 9.7 3.6 17.2 13.9 4.8 2.8 1.9 9.1 3.3 15.5 12.6 4.2 2.8 1.6 8.1 2.8 CY07 CY08 CY09 CY10 CY11E CY12E

2,008 1,743 1,707

May 9, 2011

10

Gujarat Gas | 1QCY2011 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.

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%)

May 9, 2011

11