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Prodigy of the Gas biz; faith remains intact

* Gujarat Gas (GUJGA) reported a beat on our numbers, driven by betterthan-estimated EBITDA/scm (INR5.1) and volume growth (+22% YoY to 12.1mmscmd). Morbi volumes stood at 7.3mmscmd (+33% YoY), while CNG achieved highest ever quarterly volumes. Pivotal was addition of 150 new CNG stations in FY21 totaling to 559 CNG outlets (v/s IGL’s 573 stations).

* GUJGA indicated total volumes in 1QFY22’TD stands at ~10mmscmd (with the recent month’s volumes at ~9mmsmcd) – amid the second COVID wave impact. Our volume estimates for FY22 were conservative at 12.3mmscmd and thus remain unchanged even after considering the COVID impact.

* PNGRB has granted authorization to transfer the Amritsar and Bhatinda GAs from GSPL to GUJGA – this also has been approved by the board today. Bhatinda has huge potential for industrial gas consumption; hence, we revise up our FY23E volumes to 14.6mmscmd (from 13.8mmscmd earlier).

* The EBITDA/scm margin was strong during the quarter on the back of an industrial price hike (of INR5/scm) taken in Jan’21 – which has not been rolled back yet. Spot prices have since moderated to ~USD10/mmbtu (from USD20) – which would aid better margins for GUJGA in 1QFY22. Long-term gas sourcing for the company stood at 6mmscmd (v/s 4.2mmscmd earlier) – further facilitating the blending of gas cost.

* Based on these factors, we revise up our FY22E EBITDA/scm to INR5.5/scm (from INR5), keeping FY23E unchanged at INR5/scm (conservative stance).

* The company plans to add ~200 new CNG stations in FY22. This, we believe, would increase the CNG volume (B2C) mix and aid margins. As highlighted in our report, GUJGA would see colossal CNG volume potential if any directive is floated in Gujarat regarding the levy of Green Tax.

* We upgrade our FY22/23E EPS by 15%/10%, marking the fifth consecutive quarter of EPS upgrade on the back of robust volume growth. We further present upside risk to our call from the likely addition of 60+ new industrial units in Morbi over the next year, with current units undergoing expansions and the emergence of ceramic cluster at Aniyari (potential of 0.5mmscmd).

* We highlight that for every 10% change in volumes/margins, our EPS changes by 8%/11%. The stock trades at 21x P/E, and we value it at 24x FY23E EPS to arrive at Target Price of INR615/share. Reiterate Buy.

Beat led by better EBITDA/scm; surprise on volumes continues

* Total volumes were 5% higher than est. at 12.1mmscmd (+22% YoY).  PNG I/C volumes stood at 9.7mmscmd (+24% YoY).

* PNG domestic volumes were 0.7mmscmd (+11% YoY).

* CNG volumes came in at 1.7mmscmd (+16% YoY).

* EBITDA/scm stood at INR5.1 (v/s our est. of INR4.1 and INR5.8 in 3QFY21).

* This was primarily due to better gross margins at INR7/scm (v/s our est. of INR6.5). Opex remained flat QoQ at INR2/scm (v/s INR2.4 in 4QFY20).

* Reported EBITDA came in at INR5.5b (+30% YoY). PBT stood at INR4.7b (+45% YoY) on lower interest expense. PAT stood at INR3.5b (+42% YoY).

FY21 performance – margins expand, volumes remain flat YoY

* FY21 EBITDA was up 28% YoY to INR20.9b, with PBT up 41% YoY to INR17.1b (on a 39% YoY reduction in interest cost to INR1.2b). PAT stood at INR12.8b (+7% YoY, as the company recognized DTL benefits in FY20).

* Growth during the year was primarily attributable to EBITDA/scm expansion to INR6 in FY21 (v/s INR4.7 in FY20). Total volumes were flat YoY at 9.4mmscmd (with PNG I/C volumes flat YoY at 7.4mmscmd).

* The company announced dividend of INR2/share.

Valuation and view – reiterate Buy

* We understand that any directive launched as a pollution control measure, or the impetus on growing gas consumption in India, would greatly benefit GUJGA (v/s the other two incumbents – IGL and MAHGL – that have been under the purview of stricter norms/impetus since 2001 and prior).

* It would be the biggest beneficiary of any directive on Green Tax by MoRHT (our report) – as Gujarat thus far has no government directive on the use of CNG.

* Once gas is included under GST, GUJGA would benefit from increased volume offtake – as industrial consumers would be able to take input tax credits, thus lowering their gas feedstock cost.

* The company board has approved the valuation for the transfer of the Amritsar and Bhatinda GAs at INR1.6b (subject to the GSPL board’s approval). GUJGA has incurred capex of INR2b (INR1.2b as capitalized assets and INR0.8b as CWIP), for which it has received a facilitation fee income (of INR27m).

* GUJGA has the best RoE profile of 26–30% and is expected to generate FCF of ~INR27.7b over the next two years. The company would supposedly turn net cash in FY22 despite capex plans of INR10b for FY22 and FY23 each (capex would be funded through internal accruals only). Reiterate Buy.

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