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Strong margin-led earnings beat; volume hit by high LNG price

Gujarat Gas’ (GGas) 2QFY23 standalone EBITDA was significantly higher at INR 6.4bn vs. JMFe/consensus of INR 5.9bn/INR 5.6bn, due to higher-than-expected EBITDA margin though volume decline was sharper than expected. Sales volume was weaker than expected at 7.6mmscmd (down 22% QoQ) vs. JMFe of 8.6mmscmd due to industrial volume being 17% below JMFe at 4.5mmscmd (down 33% QoQ). However, EBITDA margin was higher at INR 9.2/scm vs. JMFe of INR 7.5/scm due to lower-than-expected gas cost probably due to minimal spot LNG usage given lower-than-expected volume. Despite near-term concerns on margin/volume on account of sustained high spot LNG prices, we reiterate BUY (TP of INR 600) as we expect volume growth momentum to sustain in the medium to long term led by rise in gas use in the industrial segment.

* Sales volume 11% below JMFe at 7.6mmscmd due to sharp decline in industrial volume: GGas’ 2QFY23 standalone EBITDA was significantly higher at INR 6.4bn vs. JMFe/consensus of INR 5.9bn/INR 5.6bn, due to higher-than-expected EBITDA margin though volume decline was sharper than expected (lower volume is margin accretive for GGas in a high spot LNG price scenario, as the company makes limited/negative margin on this high-cost spot LNG volume). Hence, PAT was also higher at INR 4.0bn vs. JMFe/consensus of INR 3.6bn. Sales volume in 2QFY23 was weaker than expected at 7.6mmscmd (down 22% QoQ and down 33% YoY) vs. JMFe of 8.6mmscmd due to sharper-than-expected decline in industrial volume. Industrial volume was 17% below JMFe at 4.5mmscmd (down 33% QoQ and down 49% YoY) due to 1-month shutdown of Morbi industrial units in Aug’22 (because of limited demand), and also because a few industrial units shifted to propane (as it became more competitive vs. high spot LNG price). CNG volume was 7% below JMFe (down 3.9% QoQ, but up 18.4% YoY).

* However, rise in EBITDA margin was higher than expected: EBITDA margin was higher at INR 9.2/scm vs. JMFe of INR 7.5/scm (from INR 6.8/scm in 1QFY23) due to lower-than-expected gas cost probably due to minimal spot LNG usage given lower-than-expected volume (lower volume is margin accretive for GGas in a high spot LNG price scenario, as the company makes limited/negative margin on this high cost spot LNG volume). Gas cost was lower QoQ at USD 15.2/mmbtu or INR 43.7/scm in 2QFY23 vs. JMFe of USD 16.8/mmbtu (and vs. USD 17.5/mmbtu in 1QFY23). However, opex was slightly higher at INR 3.8/scm (vs. INR 3.0/scm n 1QFY23) due to negative operating leverage on account of lower volumes. During 2QFY23, the company added over 45,400 new domestic customers, 20 CNG stations, 257 commercial customers and commissioned 61 new industrial customers.

* Reiterate BUY despite near-term concerns on account of high spot LNG prices: Despite near-term concerns on margin/volume on account of high spot LNG prices, we reiterate BUY (unchanged TP of INR 600) as we expect GGas’ volume growth momentum to sustain in the medium to long term led by rise in gas use by industrial consumers (driven by economics, and also as regulators force industries to move towards cleaner fuels) and due to limited threat from rise in penetration of electric vehicles. At CMP, GGas is trading at 23.5x FY24 P/E and 4.5x FY24 P/B. Key Risks: a) continued high spot LNG prices posing risk to margin/volume; and b) risk to volume/margin due to competition from cheaper alternative fuel (propane).

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