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About the stock: Gujarat Gas is one of India’s largest city gas distribution companies with highest sales volume among listed peers.

* Sales volume grew at 15% CAGR in FY17-22 driven by industrial PNG

* The company benefitted from NGT order for Morbi industrial area

Q1FY23 Results: Gujarat Gas (GGL) reported results that were higher than estimates on the profitability front driven by realisation and gross margins.

* Revenue was up 71.7% YoY to | 5170.1 crore (estimate: | 5110.8 crore) driven by higher realisation

* Gross margin was at | 9.8/scm, down | 0.6/scm YoY as higher realisation was offset by surge in gas costs. Subsequently, EBITDA was at | 606.6 crore, down 16.1% YoY (estimate: | 482.4 crore)

* PAT was at | 381.1 crore, down 20% YoY (estimate: | 292.9 crore)

What should investors do: GGL’s sales volume is expected to remain subdued in near term. Additionally, gas sourcing costs are expected to remain elevated in medium term amid potential increase in domestic gas costs.

* We change our rating on the stock from BUY to HOLD

Target Price and Valuation: We value GGL at | 500 i.e. 23x P/E on FY24E EPS

Key triggers for future price performance:

* Volume growth in industrial PNG segment driven by Morbi industrial volume. Growth in CNG, domestic PNG to support volume growth

* Better pricing power and regulatory tailwinds over long term

* In the near term, price hikes/global LNG costs trend will be key monitorable

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

* Gail 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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