GGAS has tweaked its business strategy and is pursuing volume-driven growth. Interestingly, this change in strategy coincides with a weak outlook for LNG prices and ebbing out of industrial activity as per the brokerage. Price rationalisation for getting customers back, foray in five new geographies, and possible regulatory intervention on consumers flouting regulations while purchasing liquid fuels are some of the key factors that will propel volume growth through FY16-18ii, as per IIFL. Further, savings in gas costs (RasGas changes) and action against consumers flouting environmental norms can potentially lead to 135% pa earnings growth over FY16-18ii.
The brokerage reckons that GGAS is well poised to expand its margins through FY17/18 despite the company's margins being lackluster at best during FY15/FY16 because of an expensive take-or-pay Ras Gas contract. It believes that the impact of lackluster margins has played out since price-sensitive customers are now off the network. Given this scenario, the strategy of sourcing inexpensive spot gas for meeting incremental sales should lower overall gas costs and alleviate pressure on margins as per IIFL. The house envisages 61 percent pa earnings growth through FY16-18ii, backed by 10 percent increase in volumes, which will likely lead to a gradual margin expansion of 325bps.
IIFL is of the view that pickup in industrial activity and opportunistic sourcing of inexpensive spot gas are essential prerequisites for GGAS' earnings growth from now onward. Consensus expects LNG prices to remain weak. Industrial activity is a key interim risk, but the house has priced in its base case adequately with its valuations at 24x FY17ii EPS price. The brokerage envisages further re-rating, driven by improved industrial activity and news flow on possible changes in the RasGas contract, which could lower overall gas costs.