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Strong show amid challenging conditions

* Gujarat Gas posted Q3FY21 EBITDA/PAT of Rs6.15bn/3.92bn, up 66%/100% yoy, down 16%/17% qoq and 40%/56% above estimates on a 6% volume beat and a 32% EBITDA/scm beat. Interest cost declined 28% qoq, with net debt down 19% to Rs7.0bn.

* Gas sales volumes grew 16% qoq (23% yoy) to 11.45mmscmd. Industrial PNG was up 17% qoq (29% yoy) to 9.2mmscmd, with Morbi up 20% to ~7.0mmscmd. On a yoy basis, CNG/Dom. PNG/Comm. PNG was up 2%/up 11%/down 18% to 1.5/0.6/0.1mmscmd.

* Net realization fell 3% qoq, while gas cost rose 9%, resulting in a gross margin decline of 24% qoq to Rs7.8/scm (an 18% beat though). Opex/scm fell 10% qoq to Rs1.9 (down 12% yoy and 12% below est.). EBITDA/scm came in at Rs5.8, down 28% qoq/up 35% yoy.

* We raise FY21/22/23E EPS by 14%/16%/13%, building in 5-7% higher volumes as well as EBITDA/scm each, based on strong run-rate and management guidance. We increase our DCF-based TP by 27% to Rs475 with a lower 10% WACC. Retain Buy with OW.

Highlights: GGL’s margin beat was due to gas sourcing in advance at lower prices and GSPC group synergies. CNG/commercial PNG sales volume rose 20%/50% qoq while domestic PNG remained flat. Employee cost went up 1% yoy/down 6% qoq, while Other Expenditure rose 10%/8% to Rs1.58bn. Depreciation and tax rate were largely in line. GGL prepaid loans amounting to Rs9.88bn in 9MFY21. It commercialized 83 new CNG stations in 9M and incurred a total capex of Rs4.7bn.

Guidance: Current volumes are at ~11.5mmscmd, while FY21 exit is expected at 12mmscmd and FY22, on average, should be higher than the exit (12.5mmscmd our est.). Going ahead, GGL aims to clock at least 10% volume CAGR. Existing area ramp up as well new areas are adding to volumes. The company has started operations in all new GAs in terms of CNG stations, while PNG and industrial connectivity is underway. The NGT ban on South Gujarat cluster, PNGRB’s restriction to GAIL in Dahej, etc. are other optional upsides. GGL’s recent industrial PNG price hike of ~Rs4.96/scm is in response to spike in spot LNG prices. Morbi/non-Morbi pre-VAT prices are now at Rs33.0/34.8 per scm (6% additional VAT). Management expects Q4 EBITDA/scm to be in the Rs4.0-4.5 range at least, while FY22 guidance is ~Rs5.0. With propane prices moving up, GGL is in a comfortable position in terms of pricing. FY22/23 capex guidance stands at Rs8bn each. The implementation of GST in gas could entail ITC savings of Rs500mn annually to GGL (service tax paid being stranded now), while customers should benefit from ITC on the 6% VAT paid in gas purchases.

Valuation: Our Mar’23E DCF-based TP of Rs475 implies an 18.3x target PE multiple, which is reasonable with ~27% ROE/26% EPS CAGR for FY20-23E. Key risks: Adverse oil-gas prices, currency, regulations, competition and operational-project issues

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