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The Green Wave – upgrading the multiple

* Gujarat Gas (GUJGA) has proved to be a clear outperformer since the curbing of polluting fuels at Morbi – an impetus by the government toward the adoption of greener fuel.

* Since our upgrade in Dec’19, the stock is up 116% – it has outperformed the Nifty by ~95% – despite which the stock trades at 21x FY23E EPS currently.

* Interestingly, we have upgraded our EPS every quarter since then (from INR12.3 to INR19.9 for FY22E) on the back of better-than-expected volume growth.

* CGDs have been a true consumption story and, as highlighted in Exhibit 1, the market has always valued volume growth for these names. GUJGA has clocked volume growth of ~8% QoQ each time since 1QFY20 – despite the COVID-led disruption witnessed in 1HFY21. Over the past five years, the company has posted a volume CAGR of ~11%; we build in the same volume growth over the next two years as well.

* The Ceramic Association of Morbi expects growth of 25–30% in FY22 (v/s ~15% in FY21) as 60 more industrial units are likely to be commissioned over Oct–Dec’21 and the current units would undergo further expansions.

* Also, we have been highlighting that any further pollution control measure or impetus on growing gas consumption in India hereafter would benefit GUJGA significantly (v/s the other two incumbents).

* GUJGA would be the biggest beneficiary of any directive on Green Tax announced by MoRHT (refer to our report) – as Gujarat has no government directive on the use of CNG yet.

* Once gas is included under GST, GUJGA would benefit from increased volume offtake, as industrial consumers would be able to take input tax credits, thus lowering their gas feedstock cost. GUJGA would be able to take tax credit on opex and capex as well.

* Factoring in all of the above, the stock demands an upgrade, thus closing the gap v/s IGL (same volume growth potential of 10–12% over the medium term) – we value the stock at 24x (from 22x earlier) to arrive at Target Price of INR560/share. Reiterate Buy, with the possibility of further earnings upgrades going forward.

Green Tax – Industries to be the biggest beneficiary

* On 17th Feb, PM Modi stated that the government was committed to bringing natural gas under the GST regime (article). We have discussed the topic in detail in our report, ‘Inclusion of natural gas in GST would be positive’.

Basic tenets remain the same

* Since 2014, the focus on gas has been increasing to tackle pollution in the country – via increased CNG/PNG penetration and higher offtake from industries (in line with an increase in the gas mix to 15% v/s 6–7% currently).

* The implementation of GST would also reduce the various anomalies that currently prevail, such as different states charging a different VAT on CNG. For example, Delhi charges nil, Maharashtra charges 13.5%, and Gujarat charges 15% VAT.

* Our study suggests an 18% GST rate could marginally benefit CNG. However, it may be marginally negative for PNG-domestic. It would also benefit industrial consumers the most.

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