Out of gas

Gujarat Gas shares fell by over 5% on Friday, as the company reported a 46% drop in its net profit for the December quarter. This was primarily on account of significant loss in the company’s transmission business. Gujarat Gas, which is India’s biggest gas distribution company, arns transmission income from third party transportation of gas on its Hazira Ankleshwar pipeline. Contracts amounting to 80% of its total transmission volume expired by September 2005, which led to a dip in not only revenues but also profitability in the December quarter. Analysts expect earnings to remain under pressure for the next 2-3 quarters due to the loss of this business. Also, it will be a while before the growth in the gas distribution business will be able to make up for this loss. According to analysts, the loss in the transmission business should be offset by the ending December quarter of 2006.
The annual results look more respectable, what with revenues growing by 14.4% to Rs 746.8 crore, primarily on the back of increased gas distribution volumes. What’s more, net profit rose 28.1% to Rs 98.8 crore. Over the last five years, volumes of the gas distribution business of the company have grown at a compounded annual growth rate of 18%. This is not surprising since natural gases are much cheaper. For instance, compressed natural gas (CNG) remains almost 30%-35% cheaper than petrol prices. In addition, regulatory directives that force old vehicles to convert to CNG work in the company’s favour. Demand, as a result, is expected to be strong going forward. The company’s share price, however, has been under pressure of late, reflecting the near-term disappointment with the drop in transmission income. Besides, valuations are not cheap either, since the company’s trades at a price-earnings ratio of 18 times consolidated earnings.