Q1FY24 Review: Gujarat Gas: Walking a tight rope

4 Aug 2023 , 12:43 PM

Analysts of IIFL Capital Services downgrade Gujarat Gas’s (GGAS) FY24/25 PAT by 30/31%, on the back of a miss in Q1 + lower margins (~5/scm vs ~Rs6/scm earlier). Earnings can fall further if the company continues to price LNG vs propane to gain back volumes. Q1 PAT was down 44% YoY, as volumes fell 5% YoY and margins were down 32% YoY. Material upside to the stock is seen, provided GGAS takes course correction/gets lucky in H2: propane up, LNG soft, and take price hikes at a time when the country approaches elections. Downgrade to ADD. 

Bad quarter: 

GGAS’s Q1FY24 PAT was down 44% YoY. Volumes were down only 5% YoY, but Ebitda/scm crashed 32% YoY to Rs4.6 as the cut in end-consumer prices exceeded reduction in gas costs. The 11% YoY decline in I&C volumes was partly offset by a 7%/9% YoY rise in CNG/ DPNG segments. Despite aggressive price cuts, Morbi volumes are down 15% YoY. The share of I&C/CNG/domestic volume was 65%/28%/7% vs 69%/25%/6% YoY. Netting out margins on CNG, it appears that the I&C portfolio has not earned any margins. The decision to acquire stake in GSPC LNG (~8% for Rs1bn) is intended to serve Morbi cluster; we think the payback for this investment is uncertain. 

Hopeful of propane spike in H2: 

During the post-earnings call, GGAS CFO said: 1) In the long run for growth, focus is to balance volume/margin matrix; opportunity landscape is significant (existing/ new GAs). 2) Target Ebitda/scm is Rs4.5-5.5 (vs Rs6.3 FY21-FY23 avg.). 3) Propane prices should increase in H2FY24 (winter + import duty) and offer tailwinds for recovery in volume/ margins. Morbi can clock ~6mmscmd and drive the desired volume growth. As of now, propane is cheaper by nearly Rs4/scm vs LNG. 4) It will spend Rs10-12bn p.a., for infra augmentation and connect new consumers; funding of the capex would be through internal cashflows. 5) It will sign ST/MT contracts to procure LNG as and when the opportunity arises. As of now, the company has balanced portfolio mix until 2025. 

Analysts of IIFL Capital Services cut earnings; see further downside: 

To reflect on Q1 performance and margin guidance, analysts of IIFL Capital Services cut GGAS FY24/FY25 PAT by 30/31%. GGAS’s strategy to price LNG w.r.t propane seems to be risky, and not in sync with other CGDs. It will induce volatility in earnings for which a course correction is warranted, failing which there is further downside to earnings. The stock may not offer any meaningful upside until then.