IGI Logo

Gujarat Gas (GGL) has taken a second price cut in 4 months, reducing the base price in industrial retail segment to Rs44-46/scm for Morbi and other regions. The sharply lower spot LNG prices over Feb-Mar’23, coupled with the potential softening in propane prices from Apr’23 (communication from LPG sellers indicates a 14-15% reduction in propane prices from Apr’23 at Morbi) have likely driven GGL’s price-cut decision. GGL seems to be following a strategy of maximising volumes by sacrificing margins over H1FY24, with the softer spot LNG prices and softer crude prices both helping reduce sourcing costs. However, for H2FY24, if commodity prices see strength due to EU gas storage top-up and Chinese demand recovery, our sense is that GGL will look to focus on margins and volume growth may taper off a bit. Irrespective of the split between volumes/margins, our FY24E EPS estimate of Rs23/sh (revised with this note) seems to face limited downside risk. Further, FY25E can see stronger growth with additional LNG supplies, some domestic supply boost and normalisation of LPG prices to provide better pricing power for GGL. We factor-in
a steady 5% EPS CAGR over FY23E-FY25E, and retain our ADD rating on the stock.

* Gas propane economics improved in Mar’23, Apr-Jun’23 can see some tightening: Mar’23 saw for the first time in several months propane prices turning to a premium over GGL’s industrial prices (also helped by a sharp price cut taken in Jan’23 by GGL). The higher number of units building capability for dual fuel in the Morbi region, has driven volumes sharply lower for industrial/commercial (I/C) segment (Q3 I/C volumes of 4.2mmscmd declined 51% YoY, 9% QoQ). The Mar’23 spike in propane prices by ~22% helped drive Morbi volumes to ~6mmscmd (highest in the last 15 months). Apr-Jun’23future prices however indicate that propane prices may again decline to ~Rs40/scm levels. The price cut by GGL therefore indicates the willingness to match the same to keep price-competitiveness, hence demand intact.

* Longer-term volume growth prospects stronger: Even at conservative estimates in the near term, growth potential of GGL’s geographic areas remains unmatched among peers. We see the following key drivers for the same: i) volume growth visibility from ~20 new areas developed over the past few years, ii) transfer of the lucrative Amritsar/Bhatinda area from parent group, and iii) significant legal win over Adani Gas to get the Ahmedabad extension area. All this adds to the already significant volume growth potential from Morbi and other extant areas. We estimate a volume CAGR of ~4% over FY22-FY28E for GGL.

* Maintain ADD: Despite the near-term comfort on pricing and volumes, we do see headwinds from propane to gas economics post H1FY24E and limited traction in earnings over the next 18-24 months (our revised estimates imply a 5% EPS CAGR over FY23E-FY25E). Multiple of 19x FY25E EPS fairly values the risk-reward. Reiterate ADD.

* Key risks: 1) Renewed LNG price escalation, 2) inability to take price hikes, and 3) failure to execute the company’s ambitious network expansion plans.

To Read Complete Report & Disclaimer Click Here

https://secure.icicidirect.com/Content/StaticData/Disclaimer.html

Above views are of the author and not of the website kindly read disclaimer