Gujarat Gas: Uncertain near term

6 Nov 2023 , 01:12 PM

Recommendation: Add; Target Price: Rs 460

 

Analysts of IIFL Capital Services cut Gujarat Gas (GGAS) FY24-26 earnings by 10-15%, on back of lower volumes + spread; if volatility in LNG persists, the earnings have downside risks. GGAS is eyeing a 10% pa volume growth on back of stable Morbi, ramp up in other industrial areas, and CNG with Rs4.5-5.5/scm Ebitda. While in the long run, seamless execution can make GGAS an interesting stock (27 GA, solid balance sheet, etc), near term visibility is poor; valuations are at a premium to IGL/MGL with no visible trigger. 

Eyeing 10% volume growth: 

GGAS is eyeing 10% pa volume growth on back of -1) stable Morbi volumes; 2) pick up in non-Morbi (Alang, Punjab, outer Thane etc); 3) acceleration in CNG sales. The Morbi market may grow, provided LNG falls and Propane rises. The plan is to invest Rs12-14bn pa in infra expansion, including pipelines, CNG and LNG stations. Mgmt is eyeing Rs4.5-5.5/scm Ebitda, and sees an upside provided it manages to secure LNG / domestic gas on favorable terms. 

Uncertain near term:

GGAS has 27 GAs under operations, where over the next decade it can sell 22-25mmscmd gas (vs 9.3mmscmd sales now), and to that extent runway for growth is strong. The near term growth visibility however is poor, given volatility in LNG/Propane spreads which cap Morbi volume; further, non-Morbi ramp up is muted, given weakness in chemicals/export activity; and to that extent, CNG should alone drive growth, which remains susceptible to EV/Govt policy. The growth visibility could improve materially, provided GGAS gets grip on pricing LNG to industrial segment and balance volume/margin mix. 

Downgrade EPS by 10-15%: 

Analysts of IIFL Capital Services cut Morbi / Non-Morbi gas sales for FY24/26 given GGAS’ evolving pricing strategy and rising competition from alternative fuels; the concomitant earnings cut is 10-15%. The earnings growth has downside risks, if Morbi’s growth dwindles, and remains sensitive to Ebitda/scm assumptions; Rs0.5/scm change leads to ~10% swing in FY25 PAT on unchanged volumes. The valuations are at premium to IGL and MGL, reflecting the lower contribution of CNG to overall sales thereby insulating from risks of EVs in the long run. Analysts of IIFL Capital Services will evaluate their assumptions on volume growth /margins progressively as more clarity evolves on pricing.