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Long term outlook positive...

Gujarat Gas’ Q4FY21 results were ahead of our estimates on the operational and profitability front. Revenues increased 28.6% YoY to | 3428.9 crore (our estimate: | 3465.1 crore) as sales volume jumped 22% YoY during the quarter. Sales volume at 12.1 mmscmd was above estimate of 11.7 mmscmd. Realisation was at | 31.4/scm (our estimate: | 32.9/scm). Gross margins at | 7/scm were in line with expectations. EBITDA was at | 554.3 crore (up 29.9% YoY) above our estimate of | 507.3 crore on account of better operating leverage. Subsequently, reported PAT increased 42.3% YoY to | 349.9 crore, above our estimate of | 302 crore.

Healthy volume growth across segments

The quarter witnessed strong growth of 22% YoY in volumes to 12.1 mmscmd. Industrial volumes continued their growth momentum and were at 9.6 mmscmd vs. 7.7 mmscmd YoY and 9.2 mmscmd QoQ. CNG volumes at 1.7 mmscmd also reported strong growth on YoY (16%) as well as sequential basis (11%). Domestic/commercial PNG volumes at 0.8 mmscmd recovered fully and were up 8% YoY. While volume growth across segments was encouraging, current quarter (Q1FY22E-TD) has seen a decline in demand owing to Covid-19 led restrictions. However, the decline is limited compared to the first wave of Covid-19. We expect sales volume growth from Q3FY22E onwards (over base of Q4FY21). Overall, we believe industrial PNG demand will lead volume growth in the medium term while CNG will contribute in the long term. We revise estimates and expect volume in FY22E and FY23E at 11.8 mmscmd and 13.5 mmscmd, respectively.

Margins dip from highs; expected to stabilise, going ahead

Gross margins were flat YoY to | 7/scm. On QoQ basis, gross margins fell by | 0.7/scm as expected due to increase in gas costs. Similarly, EBITDA/scm was at | 5.1/scm, up | 0.4/scm, down | 0.7/scm QoQ. Margins have fallen from historic high in Q2FY21 and are expected to stabilise, going forward. Gujarat Gas’ focus remains on striking a balance between right volumes and margins at appropriate time intervals. The company has good pricing power that enabled it to take a price hike in Q4FY21 to pass on increased spot LNG costs, resulting in stable margins in coming months. Going ahead, we expect gross margins at | 8.1 scm and | 7.9/scm for FY22E and FY23E, respectively. Subsequently, we expect EBITDA margins at | 5.6/scm for FY22E and | 5.4/scm for FY23E, going forward.

Valuation & Outlook

On account of second wave of Covid-19, sales volumes fell in the current quarter and were at ~10 mmscmd. As per our interaction with the management, sales volume has started picking up and will improve further with gradual relaxations in restrictions. We expect the growth trajectory to continue with healthy demand from industrial segment. In the long term, rise in volumes driven by regulatory tailwinds, further penetration in existing geographical areas (GAs) and aggressive expansion in newly acquired GAs will lead to sustainable growth. We maintain BUY rating on Gujarat Gas with a revised TP of | 655 (26x FY23E EPS, earlier TP | 505/share).

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