Motilal Oswal is bullish on Gujarat Gas recommended buy rating on the stock with a target price of Rs 360 in its research report dated September 08, 2020.
Motilal Oswal 's research report on Gujarat Gas
Gujarat Gas (GUJGA) has taken a price cut of INR2.5/scm on PNG Industrial at Morbi, as per our interaction with the company. Therefore, gas price realization now stands at INR24.5/scm, bringing the economies of gas at par with the current low LPG prices. According to our observation of the recent movement in prices, LPG prices fell to a record low and subsequently revived off the trough (similar to Brent prices), however, it is still down 35% YoY. Historically, LPG prices are usually cheap during the monsoon season while prices spike during winters, driven by higher heating demand. -Industrials account for >75% of the sales volume for GUJGA - Morbi constitutes ~75% of the total industrial volume. Thus, it is an uphill task for GUJGA to maintain healthy economics of gas with LPG for its industrial consumers. Reflecting on the company's EBITDA margin, we do not see GUJGA breaching INR5/scm on a sustainable level for the time being. However, we would also like to highlight two scenarios in which EBITDA/scm may rise on a sustainable basis: • If the NGT comes up with similar orders banning dirty alternate fuels at other industrial clusters in GUJGA's operating areas (refer our earlier report), and • CNG takes a larger pie in the total sales mix since it is the most profitable segment. During our recently concluded conference (AGIC), GUJGA stated that total volumes averaged ~9.5mmscmd QTD 2QFY21, of which industrial volumes stood at ~7.6mmscmd (Morbi ~6mmscmd v/s peak of 6.3mmscmd achieved in 4QFY20, which reflects incremental room for growth). However, CNG remains a laggard and recovery is likely to range between 80-85% of pre-COVID levels in the near term. GUJGA has seen the fastest recovery in volumes post lifting of the lockdowns. Also, the company should see a major volume boost of ~10% CAGR over the medium term on the highest volume base amongst peers.
Outlook
We reiterate GUJGA as our top Buy (at INR360/share, valuing it at 22x FY22E EPS), with the best RoE profile of 22-26% and expected FCF generation of ~INR20b over FY21-FY22E.
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