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Proves to be an outperformer – beats on all front

* GUJGA continues to surprise on volumes growth (11.4mmscmd) and margins (INR5.8/scm) – clocking better than expected numbers.

* Realisation remained strong at INR26.9/scm (-8% YoY, -3% QoQ), while opex was down 11% YoY at INR1.5/scm (flat QoQ).

* As per our interaction with GUJGA, Morbi volumes stood ~7mmscmd in 3QFY21 (v/s ~6.3mmscmd in 2QFY21). Currently, total volumes are above 11.5mmscmd.

* Volumes growth over the last couple of quarter has been robust led strong export orders at Morbi (in lieu of increased demand from the GCC and the USA, while consumers adopt China+1 strategy). This has also resulted in the emergence of a new ceramic cluster at Aniyari – a potential 0.5mmscmd market in the making.

* During 9MFY21, the company has commercialized 83 new CNG stations. As highlighted in our report, GUJGA has huge CNG volume potential if any directive is floated in Gujarat with respect to the levy of a green tax.

* GUJGA has been agile and aggressive with its pricing strategies, striking a balance between economics of gas and alternate fuel prices. During FY21, on the back of huge volatility in global commodity prices, it increased the discount to Morbi customers in 1H (by ~INR4/scm), but rolled that back in Dec’21 and took a price hike in Jan’21 (of ~INR5/scm).

* Considering the efforts of management, in delivering volumes growth as well as maintaining sustainable margins, we build in volumes of 9.2/12/13mmscmd for FY21/22/23E (on a conservative basis). While we revise our EBITDA margin slightly up to INR5/scm (from INR4.8 earlier) and believe it to sustain in a long run as well.

* GUJGA has started taking ~0.7mmscmd of RIL’s KG basin gas at 8.5% slope to Brent – further facilitating blending of gas cost.

* Assuming similar volume growth potential of ~10% in the medium term, GUJGA (at 17x FY23E EPS) trades at a 37% discount to IGL (at 27x FY23E EPS). Reiterate Buy.

Beat across all fronts

* Volumes were 9% higher than estimate at 11.4mmscm (+23% YoY, +16% QoQ).

   * PNG IC volumes up 28% YoY at 9.3mmscmd

   * CNG recovered to pre-COVID levels at 1.5mmscmd (+2% YoY)

   * PNG household continues to clock growth at 0.6mmscmd (+11% YoY)

* EBITDA/scm margin came in higher at INR5.8 (v/s our est. of INR5). BITDA was highest ever in 2QFY21 owing to historical low spot LNG prices in 1Q-2QFY21.

* Reported EBITDA stood at INR6.1b (+66% YoY). PAT stood at INR3.9b (+100% YoY)

9MFY21 performance

* EBITDA was higher 27% YoY at INR15.3b, PBT up 40% YoY at 12.4b and PAT down 2% YoY at INR9.3b (due to one-time DTL adjustment of INR2.6b in 2QFY20).

* Total volumes for 9MFY21 was at 8.5mmscmd (-9% YoY), with CNG/PNG IC down 22%/8% YoY (to 1.2/6.7mmscmd) respectively, while PNG domestic recorded growth of 15% YoY at 0.6mmscmd. ◼ EBITDA/scm margin averaged at INR6.3 (v/s INR4.7 in 9MFY20).

Valuation and view – ample growth drivers with the company ahead

* Reflecting on the company’s EBITDA margin, we do not see GUJGA breaching INR5/scm on a sustainable level for the time being. However, we would also like to highlight two scenarios in which EBITDA/scm may rise on a sustainable basis:

   * If the NGT comes up with similar orders banning dirty alternate fuels at other industrial clusters in GUJGA’s operating areas, and

   * CNG takes a larger pie in the total volumes as it is the most profitable segment.

   * Do note that a change of INR0.5/scm results in an EPS change of 11-12%.

* Spot LNG prices which spiked to >USD30/mmbtu in Jan’21 due to production issues in Australia, Malaysia, and Qatar, along with higher than expected winter demand from China and Japan – have fallen to ~USD8.4/mmbtu (for Mar’21 delivery) as seasonal demand normalizes and production issues get resolved.

* We reiterate GUJGA as our top buy (at INR490 valuing it at 22x FY23E EPS), as it trades at 19/17x FY22/23E EPS of INR19.9/22.3. With the aforementioned estimate changes, we revise our FY21/22/23E EPS upwards by 11/5/7%.

* GUJGA has the best RoE profile of ~25-28% and expected FCF generation of ~INR31.5b over the next 2 years.

* The company will supposedly turn net cash in FY22; despite capex plans of INR6-7b for FY21/22 (capex will be funded through internal accruals only).

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