We met the CEO of the recently merged Gujarat Gas (GGL is an amalgamation of erstwhile Gujarat Gas (GGAS) and GSPC Gas). The new entity is now the largest city gas distribution (CGD) player in India with volumes of ~6.5mmscmd (~1.7x IGL).
We are wary of GGL owing to its high leverage to industrial segment (75% versus 20% of IGL) resulting in: 1) near-term pressure in volumes — sharp correction in alternate oil-linked furnace oil prices (~20% cheaper than PNG) is resulting in switch by SMEs (textiles, chemicals, etc); 2) lower margins than IGL — as it primarily relies on expensive RLNG (70% of feedstock) whereas IGL gets 80% allocation of cheaper APM gas; and 3) demanding valuations — GGAS had an excessive rally, doubling YoY before delisting in May 2015 and is at 22% premium to IGL on FY16E PER.
We expect the new entity to list (around September 15) with a significant gap down, after dismal Q2FY16 and FY15 earnings, which missed consensus by ~20%. We prefer IGL over GGL. ‘Not Rated.
Post delisting, merged GGL for the first time reported consolidated earnings for FY15 and Q1FY16. Dismal Q1FY16: Lower volumes at 5.8mmscmd (6.5mmscmd in FY15), despite 11% pre–emptive price cuts to prevent switch to alternate fuels. Gross margins (R6/scm versus R6.1/scm in FY15) were also impacted. Competitiveness of PNG further deteriorated QTD and management believes stress in volumes over short term.