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Margins weaken but demand sentiment strong

Our view

The 2QFY22 reported Ebitda stood at Rs 4.19bn, above our (YES: Rs 960mn) but below street estimates (Rs 5.4bn). The beat on our estimates stemmed from higher (+10%) than estimated sales volume and lower (‐4%) than estimated gas costs. While the gas sales suffered a setback over Aug‐Sep, as tile manufacturers in Morbi took a longer than anticipated shutdown, the gas sales have rebounded to ~12mmscmd as we write.

Even as LNG prices are trending ~USD 35/mmbtu, the gas demand among GUJGA’s off‐takers is surprisingly robust, as they are able to pass on the higher gas cost to their consumers, due to strong demand environment. Recently (5th Oct’21) GUJGA undertook a sharp increase of ~Rs 9‐10/unit in gas price for industrial consumers, to pass on the higher LNG prices. Going ahead, given the demand sentiment, we are reasonably confident that GUJGA shall be able to undertake incremental price hikes should the need arise.  

Since our downgrade, post 1Q earnings the stock has corrected by ~12%, now that demand sentiment is strong and margins appear reasonably protected, we upgrade GUJGA to ADD with a TP of Rs 650/sh.

Result Highlights

* 2QFY22 Profitability:  The operating profit and PAT for the quarter stood at Rs 4.2bn (‐43%%  YoY; ‐42% QoQ) and Rs 2.4bn (‐48% YoY & QoQ); The profitability declined QoQ and YoY, despite higher gas sales, as cost of gas increased by 62% YoY & 25% QoQ, leading to weaker realized margins.  

* Per unit margins: The Gross spread and EBITDA per unit stood at INR 6/scm (1QFY22: 10.4/scm) and INR 3.99/scm(1QFY22: 7.94). Higher LNG price, leading to 62% YoY and 25% QoQ higher gas cost, resulted in weaker gross margins and Ebitda margins.

* Gas Sales: Total gas sales stood at 11.4mmscmd(+16% YoY & +14QoQ), with   Industrial at 8.7mmsmcd (+11% YoY; +12% QoQ), of which Morbi accounted for 6.4mmscmd; CNG: 1.96mmsmcd (+53% YoY+26% QoQ) ; PNG Domestic: 0.6mmscmd (flat YoY; +8% QoQ) and  PNG commercial at 0.12mmscmd (+84% YoY; +37% QoQ).   

* Infrastructure development: During the 2QFY22, GUJGA added 26 new CNG stations

* Customer addition: GUJGA has added approximately 50 thousand domestic consumer in the 1HFY22, and has a target of adding 150 thousand consumers in the FY22.

Valuation

We value GUJGA at Rs 650/sh (Mar’23) on DCF basis, were we estimate an earnings CAGR of ~12% (FY21‐30e) backed by a volume growth of ~11% CAGR (FY21 ‐30e). Our target price implies a target multiple of 21.5x, as against 19.6x stock is currently trading at.

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