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Published on 6/07/2020 1:55:53 PM | Source: Motilal Oswal Financial Services Ltd

High Conviction Idea - Gujarat Gas Ltd By Motilal Oswal

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Robust volume growth to continue

Gujarat Gas Ltd (GUJGA), India's largest City Gas Distribution (CGD) player is present across 23 regions in Gujarat, Dadra & Nagar Haveli and Thane Geographical Area (GA) (barring already authorized area including Maharashtra's Palghar locale). It has more than 24,000 kms. of gas pipeline network and 400 CNG stations. It distributes close to 10 mmscmd (as on 31st Mar’20) of natural gas to over 14.5 lakh households, ~2 lakh CNG vehicles and to over 3700 industrial customers. Industrial volumes – clear winner over CNG, Commercial: With gradual lifting of the lockdown, several units at Morbi have resumed operations. GUJGA is also ramping up its capacity at Morbi to enable it to handle ~8mmscmd. Our recent interactions with the company suggests that total sales are currently at 70–75% of normal volumes, with strong demand from pharma and agrochem units in Ankleshwar, Panoli, Vapi, and others. Total volumes should reach pre-COVID-19 levels by mid to end of next quarter (2QFY21), largely due to a lag expected in demand recovery in CNG (normalcy to come in 3Q). CNG demand from auto and cab aggregators remains a challenge.

 

NGT order may provide further volumes boost: Growth in FY20 is entirely attributable to Morbi, wherein the overnight shift to gas from dirtier fuel has led to a major boost in demand. PNG I/C clocked growth of 61% YoY to 7.4 mmscmd in FY20, and CNG/PNG Domestic grew 4%/7% YoY. According to the NGT’s list of critically/severely polluted industrial clusters, Gujarat has five clusters, wherein a boost in volumes (such as in Morbi) could be witnessed. Thus, GUJGA could see a major boost in volumes, which should drive a volume CAGR of ~10% over the medium term on the highest volume base among peers. According to ‘Shell LNG Outlook 2020’, global LNG demand is expected to double by 2040 with incremental demand primarily coming in from the Power (~40%) and Industrial sector (~28%). Transportation sector demand growth, however, is expected at only ~9% over the next two decades. We believe that industrial volumes would be a clear winner for long-term growth.

 

CNG – attractive prospects: GUJGA plans to set up ~60 CNG stations in FY21 (10 were already ready to commence operations), of its total plan to set up 100 new CNG stations. This should grow the reach of CNG in Gujarat and encourage conversions. With the increasing number of CNG stations and the focus on reducing vehicular pollution, penetration in CNG segment is expected to increase. Gujarat is home to ~78,000 buses, 90,000 taxis and 8.5 lakh autos. However, GUJGA sells only 1.5mmscmd of CNG compared to 4.9mmscmd by IGL. With improving ecosystem, CNG holds bright future for GUJGA.

 

Margins-EBITDA/scm target of INR4.5–5/scm in a normalized scenario: Domestic APM prices have declined for the Apr–Sep’20 period. The recent demand destruction due to COVID-19 has led to huge global inventory buildup, and spot prices have tumbled to ~USD2/mmbtu currently. Assuming APM and LT contracts are crude-linked, GUJGA has the highest spot volumes of ~43% v/s 10–14% for IGL and MAHGL.

 

Valuation & View: We reiterate GUJGA as our top buy (at INR370, valuing it at 22x FY22E EPS), with the best RoE profile of 23-26% and expected FCF generation of ~INR21.3b over the next two years (i.e., INR31/share resulting in ~11% FCF yield).

 

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