June 12, 2017

Gujarat Gas Limited, formerly known as GSPC Distribution Limited, is engaged in Citygas distribution, including sale, purchase, supply, distribution and transport ofcompressed natural gas (CNG), liquefied natural gas (LNG), liquefied petroleum gas(LPG). The new amalgamated entity is India's largest CGD player with presence spreadacross 19 Districts in the State of Gujarat and Union Territory of Dadra Nagar Haveliand Thane GA which includes Palghar district of Maharashtra. It has a networkof 16,000 KM-long gas pipeline and 233 CNG stations constituting 22% of all CNGstations in the country, Provides 5.5 MMSCMD of Natural Gas to 34% of all domesticcustomers (10,80,000), 50% of all Commercial customers and 46% of all Industrialcustomers in India.

Business Overview:PNG Domestic: In domestic sector , PNG is primarily used as cooking fuel and forwater heating being a safer alternative than LPG cylinders.

PNG Industrial: Natural gas is mainly used in industrial applications likeheating, cooling, power, processes and manufacturing. The company is supplying PNGto nearly 2,835 industrial customers in Gujarat, covering all the major industrial zonesacross the state.

PNG Commercial: At present, the company is supplying PNG to morethan 11,900 Commercial and Non Commercial premises across the state. Commercialsetup such as restaurants, foodcourts, hotels, hospitals, resorts, canteen, hostels, Yarn Heat Setting. CharitableOrganizations with certificate of Charity Commissioner confirming their charitablepurpose are categorized as Non - Commercial Customers.

CNG: CNG is used for commercial as well as private vehicles as an alternative to petrolor diesel as it is more economical, pollution free, non-toxic and non-carcinogenic andsafe.

HAPI Pipeline: HAPI pipeline is designed, constructed, owned and operated by thecompany. It is 73.2 km long and starts at Hazira in Surat district and terminates atAnkleshwar in Bharuch district.

Outlook :Over FY13-17, the topline of Gujarat Gas Ltd. decreased at a CAGR of 12.4% whilebottom-line increased at CAGR of 97.7%. The company has a strong market share inthe industry as compared to it’s peers which could be a driving factor going forward interms of new contracts and MOUs. We expect the company to face stiff competitionin the coming years from various upcoming private players in the CGD Sector. Thecompany has comparatively higher debt as compared to it’s peers which could affectthe company’s working capital in the coming quarters. On the valuation front, at aCMP of Rs. 798 per share, the stock is valued at a TTM P/E multiple of 49.4x which isavailable at a premium as compared to the industry TTM P/E of 33.6x and TTMEV/EBITDA multiple of 17.7x which is available at a premium as compared to theindustry multiple of 16.1x. But looking at the potential of the firm at this juncture , itwill boost the topline and bottom-line. We thus give a “ Buy on Dips”recommendation on the stock.

Gujarat Gas Ltd

Source: Choice Broking Research/ Annual reports; Financial data-Ace equitywww.choiceindia.com *Please Refer Disclaimer on Website

Relative Capital Market Strength

Rating MatrixCMP Rs. 798Rating Buy on dipsCurrent Level Long term InvestmentUpside Potential 20-25%Target Period 1-2 years52 week H/L Rs. 880.0/487.1Face value Rs. 10

Sector Integrated Oil and Gas

Size Large CapF&O Stock NoLevel of Risk at CMP N/A

Shareholding Pattern Particulars Mar’17 Dec'16 Sep'16Promoter 60.9 60.9 60.9

FPIs 15.4 14.8 13.5DIIs 2.3 2.8 4.1N-Insti. 21.4 21.5 21.5

Business Services

PNG Domestic PNG Industrial

PNG Commercial CNG HAPI

0.901.001.101.201.301.401.501.601.70

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6-Ju

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6-O

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66-

Nov

-16

6-De

c-16

6-Ja

n-17

6-Fe

b-17

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76-

Apr-

176-

May

-17

Gujrat Gas Ltd Sensex

Particular (Rs. Mn) FY17 FY16

Total Revenue 52,378.7 62,454.8EBITDA (Excl OI) 7,433.0 7,276.9

PAT 2,195.0 1,883.3

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Gujarat Gas Ltd

Source: Choice Broking Research/ Annual reports; Financial data-Ace equity

Financial Snapshot :

Peer Comparison:

Particulars (Rs. Mn) FY14 FY15 FY16 FY17

Revenue from operations 77,974.2 90,062.6 62,454.8 52,378.7Gr (%) 0.0% 15.5% -30.7% -16.1%EBITDA (Excl OI) 5,740.9 11,042.4 7,276.9 7,433.0EBITDA Margin (%) 7.4% 12.3% 11.7% 14.2%PAT 284.3 4435.8 1883.3 2195.0NPM (%) 0.4% 4.9% 3.0% 4.2%Net Worth 16358.0 19909.1 15094.7 16448.8Total Assets 66,539.0 68,956.0 60,500.6 63,483.6Cash flow from Operations 4,118.50 10,943.70 6,554.20 -D/E (x) 1.0 0.7 1.1 1.4Current Ratio (x) 0.7 0.7 0.4 0.4Profitablity ratios (%)ROCE (%) 9.0% 24.9% 15.0% 12.3%ROE (%) 1.7% 22.3% 12.5% 13.3%ROA (%) 0.4% 6.4% 3.1% 3.5%

Companies CMP ROE 12M R(%) M. Cap (Rs. Mn) EPS BVPS EBIDTA Margin

(%) NPM (%)

Gujarat Gas Ltd. 798.0 13.6% 44.9 109868.6 16.2 119.5 14.7% 4.4%Indraprastha Gas Ltd. 1088.2 19.5% 92.7 152348.0 40.8 209.0 22.8% 13.5%Mahanagar Gas Ltd. 970.0 21.4% 0.0 95811.7 39.8 186.3 28.8% 17.6%

Average 952.1 18.2% 45.8 119342.8 32.3 171.6 22.1% 11.8%

Companies P/E (x) P/Bv (x) P/Sales (x)

EV/EBIDTA (x) D/E PAT(Rs. Mn) EBIDTA

(Rs. Mn) Sales (Rs. Mn)

Gujarat Gas Ltd. 49.2 6.7 2.2 17.7 1.4 2231.5 7490.6 51010.8Indraprastha Gas Ltd. 26.7 5.2 3.6 15.2 0.0 5710.7 9637.5 42225.1Mahanagar Gas Ltd. 24.4 5.2 4.3 15.3 0.2 3934.2 6441.5 22390.7

Average 33.4 5.7 3.3 16.0 0.5 3958.8 7856.5 38542.2

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Gujarat Gas Ltd

Source: Choice Broking Research/ Annual reports; Financial data-Ace equity

EBITDA increased by 32.3% in FY12 - FY16 (Rs. Mn)

Industry OverviewGovernment through PNGRB is taking a lot of initiatives to develop thenetwork of PNG (Domestic) connections and CNG corridor along majorhighways (National Highways / State Highways) realizing variousadvantages associated with PNG and CNG.Potential in CGD sectorThe share of natural gas in the energy basket of India stands at 10 percentin FY10 in comparison to the global average of 25 percent. The CGD sectoris slowly but steadily evolving at a CAGR of 8% will play a remarkable rolein the growth of India’s economy. Currently the CGD segment constitutes10 percent of the total gas consumption in India. The supply of natural gasfor CGD is around13 mmscmd in FY11 against the demand of 15.83mmscmd in the country. With an estimated demand of 100 mmscmd byFY20, CGD market is expected to grow by leaps and bounds. PNGRB hasconducted four bidding rounds, where 28 Geographic Areas (GA) havebeen put forward for implementation of CGD. With the current coverageof CGD in 77 cities and towns, PNGRB envisages to cover additional 300Gas, which is a very good opportunity for expansion of the company.Going forward, stabilization of global spot LNG prices post recent highs willease out the challenges related to supplies to price sensitive customers inthe short-term.

Q4FY17 Result Analysis :• Gujarat Gas Ltd revenue increased by 1.7% (YoY) to Rs. 14376.9mn for

the March quarter of 2017 as against Rs. 14136.6mn for the samequarter of the previous year.

• EBIDTA decreased by 34.8% (YoY) to Rs. 1463.2mn for Q4FY17 asagainst Rs. 2242.6mn in the corresponding quarter previous year.

• Profit after tax (PAT) for the Q4FY17 decreased by 53.8% (YoY) toRs. 331.4mn from Rs. 716.9mn for the corresponding quarter of theprevious year.

• Loss in profit is majorly due to increase in spot LNG prices duringJanuary without any hike in selling prices.

Particular (RS. Mn) Q4FY17 Q4FY16 Change

(YoY) Q3FY17 Change (QoQ)

Total Revenue 14,376.9 14,136.6 1.7% 12,664.9 13.5%EBITDA (Excl OI) 1,463.2 2,242.6 -34.8% 1,702.4 -14.1%

EBITDA Margin (%) 10.2% 15.9% (570)bps 13% (280)bps

PAT 331.4 716.9 -53.8% 420.7 -21.2%NPM (%) 2.3% 5.1% (280)bps 3.3% (100)bps

Order Book by Client

Estimated Natural Gas Demand for CGD

Status of CGD business in India

52,378.7

7,433.02,195.0

62,454.8

7,276.91,883.3

1,000.0

11,000.0

21,000.0

31,000.0

41,000.0

51,000.0

61,000.0

Total Revenue

EBITDA (Excl OI)

PAT

FY17 FY16

Source: www.infraline.com/cgd_report

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Gujarat Gas Ltd

Source: Choice Broking Research/ Annual reports; Financial data-Ace equity

Company Overview:Wide reachGujarat Gas has been rapidly expanding its reach in Gujarat byway of securing licenses to expand its CGD network, covering19 districts of Gujarat, Dadra and Nagar Haveli, Thane andPalghar in Maharashtra.Increased VolumeGujarat Gas is set to benefit in future from volume growth inCNG and domestic PNG segments with its expanding presenceacross several districts in Gujarat and benefit of low domesticgas prices.Better gas sourcing arrangements and stable LNGprices will enable the company to report a strong growth.Sales volume increased from 5.3mmscmd in Q3FY17 to6.1mmscmd in Q4FY17 on increase of industrial volume by17%.Growth ProspectsCompany has benefitted from removal of ban on newchemical plant on Vapi-Valsad-Ankleshwar region.Additionally, sales volume at Morbi, ceramic hub has improvedto 2.5mmscmd from 2.0mmscmd. New CGDs at Daman, Thaneand other regions offers cumulative CNG potential of2.0mmscmd in 2-3 years. Moreover, new CGDs at Dahej andAhmedabad rural will open new demand centers forpetrochemical and auto industries.The demand for NaturalGAs also increased from the ceramic district of Morbi, as moreand more tile manufacturers move up the product valuecurve. In addition tighter environmental norms and stubbornlyhigh coal prices also aided off-take of NG in Morbi.Latest AgreementsThe company has entered into a non-binding MoU withPetronet LNG Limited for exploring, dispensing and marketingof LNG including the L-CNG at GGL CNG stations which willbenefit the company in increasing the volume multi-folds.

77,974.2

90,062.6

62,454.8

52,378.7

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50,000.0 55,000.0 60,000.0 65,000.0 70,000.0 75,000.0 80,000.0 85,000.0 90,000.0 95,000.0

FY14 FY15 FY16 FY17Revenue from operations Revenue Growth (%)

5,740.9

11,042.4

7,276.9 7,433.0

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

5,000.0

6,000.0

7,000.0

8,000.0

9,000.0

10,000.0

11,000.0

12,000.0

FY14 FY15 FY16 FY17EBITDA EBITDA Margin (%)

284.3

4,435.8

1,883.32,195.0

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

0.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

FY14 FY15 FY16 FY17PAT NPM (%)

9.0%

24.9%

14.9%12.3%

1.7%

22.3%

12.4% 13.2%

0.4%

6.4%3.1% 3.4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

FY14 FY15 FY16 FY17

ROCE (%) ROE (%) ROA (%)

Choice’s Rating RationaleThe price target for a large cap stock represents the value the analyst expects the stock to reach over next 12 months. For a stock to be classified as Outperform, the expected return must exceed the local risk free return by at least 5% over the next 12 months. For a stock to be classified as Underperform, the stock return must be below the local risk free return by at least 5% over the next 12 months. Stocks between these bands are classified as Neutral.

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POTENTIAL CONFLICT OF INTEREST DISCLOSURE (as on date of report) Disclosure of interest statement – • Analyst interest of the stock /Instrument(s): - No. •Firm interest of the stock / Instrument (s): - No.

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Fundamental Research TeamName Designation Email id Contact No.Satish Kumar Research Analyst satish.kumar@choiceindia.com 022 - 6707 9913Rajnath Yadav Research Analyst rajnath.yadav@choiceindia.com 022 - 6707 9912Sahil Nandkumar Research Associate sahil.nandkumar@choiceindia.com 022 - 67079914Anas Dadarkar Research Associate anas.dadarkar@choiceindia.com 022 - 67079916Aman Lamba Research Associate aman.lamba@choiceindia.com 022 - 67079917Dhvanit Wadia Research Intern dhvanit.wadia@choiceindia.com 022 - 67079915

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