Gujarat Gas: Hold

Recommendation: Hold

Raghuvir Srinivasan

THE Gujarat Gas Company Ltd (GGCL) stock has risen sharply in the last one month since the declaration of its results for the first half of the calendar year 2000.

The stock, which was trading around Rs. 350 in mid-July, has since gained more than 40 per cent and now trades at around Rs. 530. The ramp-up in the stock price appears to be linked to the company's good financial performance in the January-June 2000 period. The stock can be held on for further appreciation by those with a long-term horizon, while fresh investment can be considered at declines from current levels.

GGCL is in the business of transmission and distribution of natural gas to consumers, predominantly industrial, in South Gujarat. It has an entrenched distribution network of about 1,350 km in Surat, Ankleshwar and Bharuch, where it presently has a base of about 1.19 lakh domestic and industrial consumers, mainly fertiliser and power units. The company sources its gas from Gas Authority of India (GAIL) and Gujarat State Petroleum Corporation (GSPC), which deliver the gas to GGCL outside the respective city limits from where the latter takes over the distribution.

The main income for the company accrues from transmission and distribution revenue, which it charges its customers. GGCL operates a 73 km transmission pipeline from Hazira to Ankleshwar, commissioned at a cost of Rs. 110 crores in mid-1999. It does not own or operate any gas-producing fields though it has in the past scouted around for suitable acreages in Gujarat. As of now, it has tied-up about one million standard cubic metres of gas from GAIL and GSPC to take care of its requirements.

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GGCL has also announced its intention to tap the compressed natural gas (CNG) market in Gujarat in a big way. It already supplies CNG in Surat and Ankleshwar for use in automobiles. It now plans to extend this across the highway from Surat to Gandhinagar and promote greater CNG usage in vehicles. To be sure, any returns on this can come only in the medium term as conversion kits for using CNG in automobiles is a costly affair. Besides, infrastructure in terms of filling stations for CNG would also have to be set up. The company is in talks with Bharat Petroleum for using its retail outlets on the highway for this purpose.

Besides the above, GGCL is also consciously promoting the usage of natural gas in new applications such as in air-conditioners, where it has tied up with Thermax and in co-generation plants for commercial and industrial applications.

The company had a good first half-ended June 30, 2000, with turnover rising 36 per cent to Rs. 140.23 crores and post-tax earnings 63 per cent to Rs. 27.92 crores compared to the previous year. Much of this growth came in the second quarter when earnings almost doubled to Rs. 15.37 crores from Rs. 8.85 crores in the corresponding previous period.

The good performance is also due to the restructuring brought about by British Gas after it acquired a majority 65 per cent control in the company. The multinational sold-off the LPG business of the company as a going-concern to the Reliance group and reversed plans for a foray into the wind-energy generation business. It also wrote-off GGCL's investment in a joint-venture with Bharat Petroleum for setting up import infrastructure for LPG at Okha, Gujarat.

The sharp focus on the core business of natural gas transmission and distribution seems to be paying off now. Though in the near term the company may show good growth, long-term prospects hinge on its ability to expand access to large volumes of natural gas. It can do this either by acquiring production acreages on its own in the prolific fields of Gujarat, or by tying up with other producers on a long-term basis.