Gujarat Gas Ltd: The Genius of Moat & Float

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How Gujarat Gas Ltd is Going to Benefit the Most?

The Oil & Gas industry has mostly been an interesting plot only for long-term wealth creation considering the long gestation of projects and monolithic nature of the business, but here in the Indian City Gas Distribution space, a different story is in making.

There are certain tailwinds flowing which make the sector attractive for medium-term investors in certain pockets, and one such pocket is Gujarat.

And here I am going to talk about the largest city gas company – Gujarat Gas Ltd.

My hypothesis here is: Gujarat Gas Ltd (GGL) is going to benefit the most from 2 strong tailwinds prevalent in this sector:

  1. Low natural gas prices
  2. Benign regulatory environment

Before that, if you enjoy understanding this stock in details and just have 15 mins then you are encouraged to watch this video:

Gujarat Gas Ltd: A Positional Play or Portfolio Stock?

Background of Gujarat Gas Ltd

Gujarat Gas Company Limited (GGCL) was incorporated in 1980 and is in the business of procurement and distribution of natural gas.

The BG Group acquired a majority stake in 1997. In October 2012, BG Group sold its 65% to GSPC Gas, a unit of the state-run Gujarat State Petroleum  Corporation (GSPC).

GSPC Gas and GGCL were merged in 2015 and the new company was named Gujarat Gas Limited.

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Shareholding

Gujarat Gas Ltd - Shareholding
Promoters are Gujarat State Petronet Ltd (54.17%) and Govt of Gujarat(6.5%)

Business Model

Gujarat Gas Ltd is India’s largest City Gas Distribution (CGD) company.

It owns 25 CGD licenses and operates in 42 districts and six states and one Union territory.

It is India’s largest CGD player with 11% of total CGD licenses and  10% total Authorised Areas. It operates Gas pipeline network of 23,200 km with 344 CNG Gas stations.

It caters to 13 lakhs Household connection for piped natural gas (PNG)

The 3 Moats of Gujarat Gas Ltd

India’s largest CGD player has the following moats:

  1. High entry barrier due to huge upfront capital requirement
  2. Pricing Power as most of its customers are captive in nature
  3. Assess to cheap gas import due to favorable location
Gujarat Gas Ltd - Market Share
Gujarat Gas Ltd - Comparison with Peers

 

GGL outscores MGL & IGL in no of GAs, Volume of gas distributed, and pipeline network

You may watch this 15 min video to understand the key difference between the business model of MGL & IGL here:

Revenue Mix of Gujarat Gas Ltd

Revenue Mix of Gujarat Gas Ltd
PNG is used for cooking & industrial fuel | CNG is used as a transport fuel

 

Total Gas Volumes of Gujarat Gas

Gas Volumes of Gujarat Gas
Currently Total Gas Volumes = 10.5 mmscmd

 

Movement of Volume Mix

Volume Mix Gujarat Gas Ltd

The mix has changed in Q1 FY20 with a sharp increase in volume from Industrial and commercial customers as shown below

Gas Volume of Gujarat Gas Ltd

In Q1 2020, the Industrial and commercial volume has increased by more than 60% leading to volume contribution to 70% from the prior period of 60%.

Reason for Gas Volume Growth

In 2019, National Green Tribunal (NGT) ordered banning the usage of coal gasifiers in the Morbi region (Gujarat) which led to an increase in the industrial demand in that region.

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Morbi region has a high concentration of sanity-ware and tiles industry, which used in Real estate.

Annual Industrial PNG Demand from this region itself is 6 mmscd.

Almost complete industrial demand of the region has moved to PNG leading to huge volume gain for Gujarat Gas Ltd.

Financial Analysis of Gujarat Gas Ltd

Revenue

Gujarat Gas Ltd Revenue

 

Sales CAGR of 26%
Growth Trends 5Yr 3Yr
Sales Growth 3% 26%
Average Operating Margin 14% 15%
PAT Growth 22% 76%

The Float

A simple idea Warren Buffett calls float could be the key to building wealth.

In Buffett’s definition, the float is a stream of cash customers create by making a regular subscription, or premium, payments to a company.

The magic of float is that it provides the third type of funding: apart from traditional debt and equity. And unlike them, the payout is quite distant and the funds are noninterest-bearing and nondilutive.

Gujarat Gas Ltd enjoys a float of Rs 1050 Cr in the form of security deposits from customers and operates with negative working capital (-Rs 850 cr in GY20) which leads to good returns for the shareholders.

Working Capital of Gujarat Gas Ltd

 

Float
Debt of Gujarat Gas Ltd
ROCE of Gujarat Gas Ltd

 

ROCE is currently higher than the long term average due to cost advantage and volume growth

CFO Position of Gujarat Gas Ltd

With CFO/EBITDA always higher than the benchmark of 80%, Gujarat Gas Ltd seems to realize most of its profit in cash.

Growth Drivers

Growth Triggers of Gujarat Gas Ltd
Growth Triggers of Gujarat Gas Ltd
Growth Triggers of Gujarat Gas Ltd
Growth Triggers of Gujarat Gas Ltd
Growth Triggers of Gujarat Gas Ltd

It may be noted that on 27 November 2020, PNGRB has announced rules to simplify the gas tariff rules to make this fuel more affordable.

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SWOT Analysis

SWOT Analysis of Gujarat Gas Ltd

Valuation

Stock Price History of Gujarat Gas Ltd

 

Although CMP is touching its 5-year high
PE History of Gujarat Gas Ltd

 

PE is below its historical average

 

Conclusion

Gujarat Gas is a growing company in a growing sector with huge tailwinds. So, it can be held for the short to medium term.

Since the stock is near its fair price hence and the natural gas prices can play havoc on the valuation multiple (current PE 25). So a long-term ‘invest and forget’ strategy is not recommended in this stock.

Also Read: Indraprastha Gas vs MGL – A 4-Points Analysis

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Amitabh Vatsya

Amitabh Vatsya

Amitabh Vatsya is an active Investment Vlogger (http://youtube.com/c/Sadhansimplified) | Loves to share his ideas at http://wealthsutra.wordpress.com | Follow him @amitabhvatsya
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