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Strong as a hulk!

…Domestic gas to lower sourcing cost

* Spot LNG prices have risen to USD34/mmBtu from USD19/mmBtu in CY21, making alternate fuels such as LPG more attractive in Morbi, Gujarat.

* However, we highlight that over the long term, LNG would continue to remain cheaper than LPG, except during the summer season. Further, increased availability of domestic gas over the few months is likely to help GUJGA reduce its sourcing cost, thereby help improve its margins.

* GUJGA trades at 16x FY24 EPS of INR25. We expect its volume to register a CAGR of 13% over FY22-24E. Valuing the stock at 26x FY24E EPS, we reiterate our Buy rating on the company and retain it as our top pick in the sector.

Spot LNG prices create havoc

* Russia is the second largest producer of natural gas, accounting for ~26% of global gas trade via pipeline as well as ~8% of global LNG trade ? The ongoing Russia-Ukraine crisis has driven up LNG prices to USD34/mmBtu from its USD19/mmBtu in CY21

* GUJGA has offered reduced prices to the district of Morbi until Aug’22. However, prices are still higher at INR58/scm compared with its INR27/scm from about two years ago. In order to hedge against the rise in prices, the company has gotten into a forward contract to buy a large part of its spot requirement till early CY23 at much lower prices.

LNG penetration increases in Morbi, but only a risk during summer

* There are ~700 ceramic units at Morbi, while another 15-20 units are coming up at Aniyari. Out of these, ~160 units are currently undergoing LPG installations, while another 70-80 units are in their various phases of construction

* While total gas demand (LNG/LPG) in Morbi is 8-8.5mmscmd, consumption at its peak stands at ~7.5mmscmd as witnessed in 4QFY21, since some of the ceramic units are under maintenance. The demand peak is expected to reach 9- 9.5mmscmd in another 1-1.5 years.

* With the fixed unit cost of LPG installation at INR7-10m, it does not look economical for smaller units consuming less than 2,500-3,000scmd. While the current LPG consumption stands at ~1-1.2mmscmd, we expect the total LPG capacity to rise to ~2mmscmd by CY22-end. However, barring the current flux in LNG markets, we expect LNG prices to remain cheaper than LPG, except during the summers.

Other demand avenues remain strong

* We expect Ahmedabad rural to have a peak demand of 1-1.5mmscmd in 1-2 years. The recently acquired Amritsar and Bhatinda from GSPL would aid both CNG as well as industrial volumes for the company, and we expect its peak potential to be around 0.5-0.8mmscmd. Other areas for growth are Jhagadia Phase-II, Dahej, Silvassa, and Thane rural.

* After a long time, GUJGA has started adding 100-150 CNG outlets each year. The wider spread of CNG outlets is likely to boost CNG volumes, which already reflects in the company’s quarterly sales performance. CNG volume is expected to grow at 15-20% annually.

* There are five industrial clusters in Gujarat classified as critically/severely polluted with respect to air pollution. Over the long term, with the enforcement of stricter emission control measures by the authorities , we can expect an overall rise in demand for GUJGA.

Valuation and View

* Domestic gas availability is expected to rise by ~12mmscmd (RIL) and 10mmscmd (ONGC) over the next few months. Even at a 12% slope of Brent, it would be half of the current tied-up spot LNG prices. At current consumption of 10.5mmscmd, GUJGA is expected to have ~1.7mmscmd of spot LNG in its sourcing. If it replaces the whole spot LNG by domestic gas at 12% slope, the sourcing cost for total industrial sales would be reduced by ~INR8/scm.

* While increased LPG installations would affect LNG consumption, especially during the summer season, overall, we do not expect it to be a threat to LNG penetration in the state

* We estimate 11.8/13.5mmscmd of total sales in FY23/24, up from 10.7mmscmd in FY22. Our EBITDA/scm estimate stands at INR5.5 for FY23/24, up from INR5.3 in FY22. We value the stock at 26x FY24E EPS and reiterate it as the top pick in the sector

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