Quarter led by better margin; Brisk recovery in volumes
* GUJGA reported better-than-expected margin of INR4.9/scm (higher QoQ as well), while volumes were in line with est. (at 4.1mmscmd), leading to EBITDA of INR1.85b. The company mentioned that current sales volume stands at 9.5mmscmd (v/s 9.4mmscmd of average sales in FY20), aided by strong recovery post lockdown. As per our interaction with the company, Morbi volumes are back at ~5.5mmscmd (v/s exit rate of ~6.5–6.8mmscmd in FY20). Despite lockdown, GUJGA was able to add 13 new CNG stations during the quarter and plans to add ~60 new CNG stations this year (of the total 100 planned outlets – which should further grow the reach of CNG in Gujarat and encourage conversions).
* COVID-19-led lockdown has led to some delay in the implementation of various directives announced by the National Green Tribunal (NGT) last year. However, a bench of the NGT recently sought an Action Taken Report (ATR) within four months to ensure a ban on the usage of pet coke and furnace oil by all states and UTs. The date for a further hearing is set as 15th Jan’21 (article). According to the NGT’s list of critically/severely (air) polluted industrial clusters, Gujarat has five clusters wherein the volume boost (as for Morbi) could come up. Also, GUJGA expects non-Morbi industrial volumes to reach ~2.9mmscmd by the end of FY21 from ~2.5mmscmd in FY20. Tarapur is a large industrial cluster with huge potential for industrial volumes (along with Thane, expect ~0.5mmscmd). The newly awarded 16–17 cities could see volumes of 2.5–3mmscmd over the next four to five years. Thus, GUJGA could see a major boost in volumes at CAGR of ~10% over the medium term on the highest volume base among peers. We reiterate GUJGA as our top buy (at INR360, valuing it at 22x FY22E EPS), with the best RoE profile of 22–25% and expected FCF generation of ~INR20.4b over FY21-FY22.
Better margins, in-line volumes
* EBITDA/scm was better than est. at INR4.9/scm (v/s est. INR4.1) and higher QoQ as well (INR4.7 in 4QFY20). Reported EBITDA was at INR1.85b (-60% YoY; -56% QoQ), with PBT at INR0.8b. PAT came in at INR0.6b (-75% YoY and QoQ).
Total volumes were in-line, est. at 4.1mmscmd (-55% YoY; -58% QoQ).
* CNG volumes stood at 0.7mmscmd (-54% YoY and QoQ).
* PNG I/C stood at 2.9mmscmd (-60% YoY; -63% QoQ).
* PNG Domestic was at 0.6mmscmd (+16% YoY; -13% QoQ).
Valuation and view
* PNGRB is expected to introduce competition in areas where marketing exclusivity has already expired. This would impact all CGDs. However, due to the increasing focus on industrial pollution, we expect it would be easier for GUJGA to coup up lost volumes (from the five clusters and newer GAs mentioned above).
* On a conservative basis, we assume total volumes of 8.4mmscmd for FY21 (against 9.4mmscmd in FY20) and 11.1mmscmd for FY22, with EBITDA/scm of INR4.8 for FY21/22E (unchanged). However, continued outperformance in volumes and margins could lead to upward revision in estimates, along with the re-rating of the stock.
* GUJGA is trading at 18.8x FY22 EPS of INR16.4 and 10.8x FY21 EV/EBITDA. We value the company at 22x FY22E EPS to arrive at target price of INR360.
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