Published on 24/11/2020 12:42:21 PM | Source: HDFC Securities Ltd

Buy Gujarat Gas Ltd For Target Rs.382 - HDFC Securities

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Buy Gujarat Gas Ltd For Target Rs.382 - HDFC Securities

Our Take:

Gujarat Gas Ltd (GGL) has been growing and expanding its horizons by venturing into new geographic areas and is committed to reach every possible Natural Gas user across its licensed expanse of around 1,69,500 square kilometres through its ever growing pipeline network spread across 42 districts and six states and one union territory. GGL with its 25 CGD licenses has ~24%, 41% and 36% market share in domestic, commercial and industrial connections in India, respectively. It plans to expand the network within existing geographical areas as well. The project risk on account of sizeable capex and newer geographies is partially mitigated by GGL's long-standing experience in CGD business.

We expect demand to bounce back relatively sooner for GGL, now the lockdown has been gradually lifted out as vehicles start hitting the roads and migrants are coming to work, especially in Morbi region. However, demand recovery from some industry categories is expected to be slower. GGL has seen the fastest recovery in volumes post lifting of the lockdowns. Also, the company could see a major volume boost of ~10% CAGR over the medium term on the highest volume base amongst peers. At the same time, lower input costs, can act as a cushion against lower volumes and profitability.

The newly awarded 16-17 cities could see volumes of 2.5–3mmscmd over the next 4-5 years. The Vasai-Virar region is the next big focus market for GGL after Thane – GGL is planning to supply gas through a virtual network there.


Valuations and Recommendations:

City Gas Distribution (CGD) is expected to be one of the fastest growing sectors in India. Government of India has given thrust to this sector by pushing expansion of CGD network across the country. PNGRB had invited bids in its 9th & 10th round for setting up CGD network in various parts of the country. In the 10th round of bidding, PNGRB covered 50 geographical areas spread over in 14 states and 124 districts. It aims to increase coverage of CGD cumulatively to 70% of the country’s total population and 50% of country’s area. The total investment for setting up CGD networks under 9th and 10th bidding rounds is expected to be more than Rs. 1000bn in the next eight years. The government has also planned to connect 10mn households with PNG supply for cooking purpose by 2020.


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