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Stable earnings but positives priced in; downgrade to Hold
* Gujarat Gas (GGL) reported Q3 EBITDA/PAT of Rs3.71bn/1.97bn, up 15%/42% yoy, flat qoq and 7%/17% above our estimate due to better-than-expected margins, lower interest (down 12% qoq) and higher other income. The tax rate for Q3 was 25.3%.
* Gas sales volumes were flat qoq at 9.32mmscmd (up 42% yoy, in line). Industrial PNG was slightly down 1% qoq but was offset by other segments. CNG and domestic PNG sales increased 6% yoy each, while commercial rose 10%.
* Gross margin was flat qoq at Rs6.5/scm (a 3% beat) due to weaker-than-expected gas prices. Opex/scm was also flat qoq at Rs2.2. EBITDA/scm, thus, came in at Rs4.3, flat qoq/down 19% yoy but better than our estimate of Rs4.0.
* We raise FY20/21/22E PAT by 6%/10%/10% due to higher margin guidance and TP by 19% to Rs280 rolling over to FY22 end. However, due to the recent stock run-up, positives are largely priced in. Downgrade the rating to Hold from Buy and remain UW in EAP.
Key highlights: GGL’s realization and gas costs were flat qoq despite some winter-led LNG uptick. Other expenditure was flat qoq at Rs1.44bn, while other income was up by 21% yoy to Rs186mn. Depreciation was down by 1% qoq to Rs795mn. Net debt declined from Rs17.7bn to Rs15.0bn qoq as GGL started to repay loans. 9MFY20 capex stood at Rs3.3bn with Q3 at Rs980mn. Associate Guj Info Petro has received AGR demand from the DoT, though it has filed a review petition in the Supreme Court and is awaiting its outcome. No provision has been made.
Management guidance: Current volume run-rate is ~10mmscmd (Morbi 6 vs. 5.2 in Q3) and management expects 10% growth in FY21. Industrial PNG pricing maybe linked to LPG, although did not increase prices during the winter-led LPG rate uptick. GGL is seeing better margins as spot LNG prices are now down below USD4/mmbtu. EBITDA/scm guidance is raised to Rs4.5-5.0 now from Rs4.0-4.5. Dahej, Thane, and Silvassa are seeing 0.5mmscmd+ volumes currently. 9 th and 10th Round GAs are undergoing ground-level work. PNGRB is working on the access code but will take time. The status of NGT ban on polluting clusters will be known in Mar’20 after the hearing but seeing traction among users from the same.
Outlook and valuation: We keep our volume estimates largely unchanged but have raised EBITDA/scm to Rs5.0-5.2 for FY20-22 based on the new guidance. This has driven earnings uptick and increased DCF based TP with rollover to FY22-end. GGL’s earnings trajectory is healthy with almost 20% CAGR during FY21-22E, though positives are priced in largely and we await more clarity on the NGT’s potential polluting cluster ban. We downgrade the rating from Buy to Hold. Key risks are adverse oil-gas prices, currency, regulations, industrial slowdown, competition, and operational-project issues.
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