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Gujarat Gas - Company Update - Deftly negotiating through tough times - BUY

Posted On: 2022-06-27 22:28:02 (Time Zone: IST)

Mr. Avishek Datta - Research Analyst at Prabhudas Lilladher Pvt. Ltd.

Quick Pointers:

- Spot LNG tie-ups till Feb-23 to insulate GGAS in a gas inflationary environment.

- GGAS to maximize volumes in H2 when competing propane prices are higher.

GGAS has underperformed the broader index by ~50% over last four months, as geopolitical tensions keep spot LNG prices at elevated levels of >USD30/mmbtu. Reports of ceramic units in Morbi switching to propane usage (competing fuel) have also impacted the stock performance. At CMP stock trades closer to -1 standard deviation consensus PER of last three years of 17.6x. We believe GGAS is very well placed to navigate this situation and has tied spot LNG purchase till Feb 2023 at ~USD28/mmbtu, when winter gas demand from EU will be highest. In the near term, we do not expect GGAS to compete with propane as prices are seasonally weak in Q2 and will increase in H2 (prices are higher in H2 for last five years except in FY19 due to pandemic). Further, sustained high spot LNG prices due to geopolitical tension will lead to more users setting up LPG plants which could put GGAS margins under pressure.

In a high gas cost environment, we expect GGAS to prioritize margins over volumes (like in Q4FY22) and limit spot purchase to contracted amount. We lower our FY23/24E volumes by ~6%, but factor in higher margins and our earnings change is ~6% for FY23E. We factor in ~9% volume growth and ~18% CAGR earnings growth over FY22-24E. We also reduce medium term volumes, even as we maintain margins of ~Rs6/scm and increase risk free rate to 7.4% (6.5% earlier) Accordingly, our revised DCF based PT stands at Rs553 (Rs650). Reiterate 'BUY'.

Shares of Gujarat Gas Limited was last trading in BSE at Rs. 425.80 as compared to the previous close of Rs. 420.50. The total number of shares traded during the day was 86370 in over 1583 trades.

The stock hit an intraday high of Rs. 429.70 and intraday low of 422.00. The net turnover during the day was Rs. 36828323.00.

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