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Higher gas costs impact gross margins…

About the stock: Adani Total Gas (ATGL) is India’s largest private city gas distribution company with highest number of geographical areas

It has license to cater to 52 geographical areas on a consolidated basis

The company operates 287 CNG stations as of Q3FY22

Q3FY22 Results: ATGL’s results were impacted by increase in gas sourcing costs

Revenue was up 78.4% YoY to | 931.8 crore. Sales volume was at 2.1 mmscmd, up ~25% YoY and ~10% QoQ

Gross margin was at | 14.4/scm, down | 2.7/scm YoY and | 4.1/scm QoQ on account of high gas costs. Subsequently, EBITDA declined 4.4% YoY (and 12.1% QoQ) to | 203.3 crore

Reported PAT was at | 131.6 crore, down 9.3% YoY and 17.2% QoQ

What should investors do? The company’s share price has surged ~25x since listing in November 2018.

We maintain our HOLD rating on the stock

Target Price and Valuation: We value ATGL at | 1775/share based DCF method.

Key triggers for future price performance:

Healthy pick-up in volume growth from new geographical areas

Competitive advantage against traditional fuels and regulatory tailwinds over long term

Strong capital expenditure plans in newly won geographical areas in the 11th CGD bidding round

Domestic gas allocation and LNG price trend will be key monitorable for gross margins in the near term

Alternate Stock Idea: Apart from ATGL, in our oil & gas coverage we also like Gail.

Gail is India’s leading gas transmission company, which is a beneficiary of increasing gas consumption. Stable volume growth along with higher profitability from gas trading, petchem and LPG segment due to higher oil prices will add value

BUY with a target price of | 180

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