Strong volume trajectory and profitability ahead
Gujarat Gas Limited (GGL) is one of the leading city gas distribution (CGD) companies. It operates in 23 districts in the State of Gujarat, Union Territory of Dadra & Nagar Haveli and some of the Thane Geographical Areas (GAs) and Palghar. In the latest 10th CGD bidding round by Petroleum and Natural Gas Regulatory Board (PNGRB), GGL has won 6 GAs comprising of 17 cities in Punjab, Haryana, Madhya Pradesh and Rajasthan. GGL has 344 CNG stations and around 23,200 kilometres of Natural Gas pipeline network. The company caters to over 13.5 lakh residential consumers, 12,300+ commercial customers and 3,540 industrial units.
* Government push for cleaner fuel- a key growth catalyst:
The government is focused on increasing natural gas share in the country’s energy mix from current 6.5% to 15% by FY30E (world average ~24%). This is likely to reduce reliance on costly oil imports as well as control pollution as natural gas is a cleaner-burning fuel. The government has also been increasing natural gas allocation to CNG (for vehicles) and PNG (for domestic, industrial and commercial purpose). Further, cost effectiveness of CNG (60%/40% cheaper than petrol/diesel) and PNG (40% cheaper vs LPG and equal to subsidised LPG prices) would lead to increasing use of these fuels, thereby benefitting GGL. Moreover, several government initiatives such as a) availability of cheaper domestic gas b) allocation of additional geographical areas (GA) to cover 53% of India’s area and 70% of its population are likely to lead to strong growth for CGDs including GGL in the long-term.
* Increase in penetration and network expansion to drive volumes:
GGL derives ~77% volumes (as per Q1FY20 data) from industrial segment followed by CNG (~16%), domestic/household (~5%) and commercial (~1%) segments. The ban on use of coal gasifiers by National Green Tribunal in India’s largest ceramic cluster at Morbi, Gujarat this year is likely to add to GGL’s volumes as Morbi region contributes highest to its industrial volumes and the company is the sole supplier of natural gas to this area. GGL is also focusing on the growth of CNG and domestic PNG segments. Hence, GGL is increasing penetration in existing operational areas by increasing PNG connections and through addition of CNG stations. Further, it has recently been allocated six new GAs in Haryana, Punjab, Madhya Pradesh and Rajasthan. This shall help the company augment its presence in the north and west regions of India. For this purpose, the company has laid out an annual capex plan of Rs 450-500cr for the next few years. Thus, we expect GGL’s volumes to grow at a CAGR of ~20% over FY19-21E.
Outlook & Valuation:
GGL boasts of a strong infrastructure and distribution network and enjoys near monopoly in the Gujarat state. Further, network expansion in other states shall also boost volumes going forward. Moreover, government thrust on increasing the use of cleaner fuel bodes well for CGD companies including GGL. We believe, going forward increased volume contribution from CNG vehicles and PNG domestic segments will help GGL create a more diversified business model. Moreover, the company has strong return ratios (ROE/ROCE of ~23%/~25% by FY21E), healthy cash flows and high interest coverage ratio. Hence, we recommend a Buy on the stock with a target price of Rs 214. Key Risks to our rating :-
a) Demand from the industrial customers is sensitive to price dynamics of competing fuels such as furnace oil and propane. Thus, customers may shift to alternate fuels if prices are significantly lower as compared to natural gas. This may lead to decline in GGL’s volumes.
b) If PNGRB allows third party access to existing CGD players' infrastructure network, it could lead to competition, thereby impacting the company’s volumes.
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