Robust margins lead to PAT growth...
Adani Gas’ (AGL) operating revenues fell 12.3% YoY to | 441.2 crore in Q2FY21 due to a drop in CNG and commercial PNG sales volume. However, revenues recovered sharply 113.6% QoQ as sales volume doubled QoQ. Total sales volume came in at 1.4 mmscmd, down 10.3% YoY, up 102.5% QoQ. EBITDA for the quarter increased 54.3% YoY to | 209.5 crore. Gross margins were strong at | 19.9/scm, up | 6.8/scm YoY due to lower gas prices. EBITDA/scm was at | 16/scm, | 6.7/scm higher YoY. Reported PAT was at | 135.7 crore, up 12.7% YoY.
Full recovery in industrial PNG volumes
AGL reported sales volume decline of 10.3% YoY for Q2FY21. CNG sales were down ~21% YoY to 0.6 mmscmd due to lower transportations vs. preCovid level. However, CNG sales improved 146% QoQ post relaxations in lockdown. PNG sales registered an increase of ~1% YoY to 0.8 mmscmd mainly due to full recovery in the industrial segment. On QoQ basis, PNG sales increased 80%. However, commercial PNG sales are still lower. During the quarter, sales increased MoM from 84% of pre-Covid level in July to 98% of pre-Covid level in September. Going forward, we estimate sales volume at 1.4 mmscmd and 2.1 mmscmd in FY21E and FY22E, respectively.
Low gas prices lead to strong margins
Gross margins were at | 19.9/scm YoY, up | 6.8/scm YoY, | 0.9/scm QoQ as the company benefitted from low spot LNG prices. Adani Gas’ strategy to focus on spot and mid-term contracts in source mix will keep margins healthy in the medium term. Gross margins for FY21E will remain strong due to low gas prices in H1 and margins will normalise in FY22E. We estimate gross margins at | 17.8/scm and | 15.6/scm for FY21E and FY22E, respectively. EBITDA/scm increased by | 6.7/scm YoY and was at | 16/scm. Considering recent increase in spot LNG prices, we expect EBITDA/scm to normalise from Q3FY21E onwards. We estimate AGL’s EBITDA/scm at | 13.5/scm and | 11.9/scm for FY21E and FY22E, respectively.
Valuation & Outlook
AGL's sales volume reached pre-Covid level of 1.6 mmscmd by September end with full recovery in industrial PNG segment. The continued strong capex in existing, new GAs along with favourable regulatory scenario is expected to lead to long term stable volume growth. With lower domestic gas & global LNG prices, the company is comfortably placed on margins front and also enjoys competitive advantage against other fuels. Its plan to develop integrated CGD model and auto fuel retailing under the JV Total Adani fuels marketing will also lead to creation of long term shareholder value. We have a positive outlook on the stock from a long term perspective as AGL is well poised to benefit from India’s growing CGD sector. However, due to sharp run-up in stock price, we change our rating from BUY to HOLD with a revised target price of | 230.
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