Published on 15/03/2017 3:59:05 PM | Source: Religare Capital Markets Ltd

Hold Gujarat Gas Ltd For Target RS.630.00 - RCML

Posted in Broking Firm Views - Long Term Report | #Gujarat Gas Company Ltd #Oil and Gas Sector #Broking Firm Views Report #Religare Capital Markets Ltd

Volume recovery in sight

In a recent meeting, GUJGA’s management indicated an improved outlook on volumes driven by (a) recovery in utilisation at some industrial units in existing areas of operation, (b) start-up of new ceramic and chemical plants, and (c) relatively low LNG prices. Volumes have improved to ~6.3mmscmd levels, up 1mmscmd over Q3FY17. We raise our FY18/FY19 earnings estimates by 9.7%/12% to build in higher volumes and increase our DCF-based TP to Rs 630 (from Rs 575). Maintain HOLD on demanding valuations of 18x FY19E EPS.


* Volume outlook improving:

Volumes in GUJGA’s industrial retail segment have risen to ~4.3mmscmd over the last three months backed by higher gas consumption from the ceramic manufacturing belt at Morbi, Gujarat. The recent spike in imported coal price coupled with the threat of higher taxes under the GST regime has made coal gas a less attractive alternative for industrial units. Currency demonetisation may further swing demand in favour of gas as the incentive to use other fuels diminishes with the crackdown on unreported fuel purchases (such as coal). We raise our FY18/FY19 volume estimates for GUJGA to 6mmscmd/6.4mmscmd to factor in better demand.


* New markets offer strong volume potential:

GUJGA is aggressively pursuing expansion into newer areas and plans to incur capex of ~Rs 5bn annually until FY19. The company has commenced operations in the rural Thane region near Mumbai, which holds potential demand of ~1.5mmscmd over the next 3-5 years; other areas such as Dahej and Ahmedabad district offer 2-3mmscmd of demand potential. But these volumes may come at the cost of margin dilution.


* Pricing in near-term recovery:

At 18x FY19E EPS, GUJGA is one of the most expensive domestic gas utility stocks. While its areas of operation carry high volume growth potential, near term volatility in industrial offtake persist. GUJGA’s high capex intensity would cap ROCE at 10% levels even as the expected revival in volumes over FY18-FY19 seems priced in. Maintain HOLD with a revised Mar’18 TP of Rs 630.


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