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.
In addition the company has a negative working capital position which continues to expand with the growth in the buisness. 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 invested in the business at high rates of seturn and been able to expand the business while maintaining the profitability levels.
Disclosure : I hold the stock.
9 comments:
Results for last quarter are out. EPS is now 5.63 and leas than last year's same quarter which is 7 rs. Just checking what are the ideas on your blog and how they are currently doing. This share is currently trading at PE of 10. There are lot of ideas in market which are or were trading at PE of 3 or 4 few month back (Oct 2008- Mar 2009). How this valuation can be justified or business model is unique hence value rating . (There are not much Gas Utilities companies in India). Payout of dividend is also not very liberal (1% or 3 rs for share prices (LT) of Rs 260) even though owned by BG Group (65%)
Hi oracle
not sure what is your specific question ?
yes, there were several companies which are/ were cheaper than gujarat gas. it depends on your comfort level with them. i dont think valuation alone would be a single criteria to invest.
there are other gas distribution companies like indraprastha gas, mahanagar gas, GAIL etc. Gas distribution business is a profitable business in india
Gujarat gas is a growing company which has invested capital well in the past. I would prefer the company pay less dividend and invest the capital profitability in the business.
I really liked the analysis of gujarat gas. I tried to study a bit about it myself. It is a company which has consistently given a high Return on Invested Capital a variable which I feel must be considered in Value Investing.It has a low Debt as well. The only thing bothering me is its P/E I feel this stock should be bought at its next dip. It is almost close to its 52 week high right now.
Hi sumi
my personal approach is to calculate the intrinsic value and see if the price is 50% or below. if it is, then i start buying.
i generally do not focus on whether the stock is at a 52 week high or low. i also dont follow the strategy on waiting for dips ..frankly you cannot be sure if the dip will come or not
if i am conviced about a company and its value, i will start buying. i may not get the absolute lowest price , but if my analysis is correct then i should do well in the long run.
the question to ask is do you want to make a decision based on informed analysis v/s uninformed guess ?
regards
rohit
Thanks for the quick answer Rohit. I have recently started studying stocks so glad to get such guidance. Now I need to figure out how to calculate the intrinsic worth of a company.Just downloaded the excel analysis it seems to have a lot of valuable data for me.Will go through it asap
Hi Rohit,
Thanks for sharing such valuable information. I started following your blog few months back and now a fan. I am strong beleiver of value investing and admire Graham/Buffet philosophy. But for last 4-5 years I have been investing in stocks through mutual funds and now want to do more of direct stock investments. Thus I am new to stock picking.
I have studied your template and have some basic doubts (basically I am having trouble in mapping the numbers in anal worksheet with say moneycontrol numbers), please take out some time at your convenience and clarify them for me. I am referring Gujarat Gas numbers here for example.
1) Sales: Moneycontrol shows three numbers a) Sales Turnover b) Net Sales c) Total Income. Which one to use in anal sheet.
2) Operating cost: I am mapping with 'Total Expenses', please confirm.
3) WCap: Can't map directly with anything on moneycontrol numbers. Pl suggest. Definition of WCap suggests = Current Assets - Current Liabilities. Can I use it to arrive at WCap.
4) If that is the case how can a -ve WCap a good thing. Isn't it suggest that company is not able to meet short term liabilities using current assets?
5) Fixed Asset: mapping it to 'Net Block', please confirm.
6) Cash: difficulty in mapping. Pl help. Many of articles refer to cash on books but I could not find these numbers in moneycontrol or icicidirect.
Sorry to throw such stupid qustions but am confident that you would give some direction if it is not possible to give direct answers. Also please suggest any books that can get me on fast track as far as understanding equity numbers are concerns.
Thank you,
Sachin Jadhav
Hi sachin
these are good questions. in some cases my numbers may be incorrect, so dont try to learn based on the numbers.
let me try to answer in brief
1) Sales: Moneycontrol shows three numbers a) Sales Turnover b) Net Sales c) Total Income. Which one to use in anal sheet - i use net sales. total income also includes interest income which should not be added in the operating income
2) Operating cost: I am mapping with 'Total Expenses', please confirm.
dont know the moneycontrol numbers, but it basically all costs excluding interest and depreciation.
3) WCap: Can't map directly with anything on moneycontrol numbers. Pl suggest. Definition of WCap suggests = Current Assets - Current Liabilities. Can I use it to arrive at WCap - yes you can use that. be careful in terms of cash. remove cash in excess of 5-10% of sales from the above number as that would be surplus cash.
4) If that is the case how can a -ve WCap a good thing. Isn't it suggest that company is not able to meet short term liabilities using current assets?
no, -ve wcap is actually very good. it means that the company is doing business using the suppliers money. such a company can meet its liabilities at a short notice if required via borrowings too
5) Fixed Asset: mapping it to 'Net Block', please confirm - yes
6) Cash: difficulty in mapping. Pl help. Many of articles refer to cash on books but I could not find these numbers in moneycontrol or icicidirect - that the cash in current assets and all cash equivalents (such as mutual funds, equity holding etc) which can sold if required
the above is brief discussion. for details i would recommend you to read some book on financial statement - any textbook for 1st year MBA finance will do
Thanks a ton !
~ Sachin
How good is this stock on current price?
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