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Volumes surprise; margin dips, but is likely to recover ahead

* GUJGA reported a miss on our EBITDA estimate, with lower EBITDA/scm (at INR2.3) due to abnormally high LNG price volatility that impacted margin. However, there are some signs of softening in prices. Volumes stood at 11.4mmscmd in 3QFY22. It is currently clocking volumes of over 10mmscmd.

* Volumes at Morbi stood at 6mmscmd in 3QFY22 and is currently at 5.2mmscmd. Constant rise in spot LNG prices have resulted in ~100units shutting down in Morbi in Jan’22. Exports fell 25%, with weak domestic demand. Non-Morbi volumes stood at 2.3mmscmd (up 10% YoY).

* Spot LNG prices in Jan’22 fell to USD24.7/mmBtu v/s USD32.2/mmBtu in 3QFY22. Cooling of these prices would result in a quicker volume recovery, with an improvement in EBITDA/scm from current levels. We estimate EBITDA/scm of INR5.1/INR4.7 in 4Q/FY22 v/s INR6.1 in FY21.

* The company’s volume growth prospects remain robust with the addition of over 60 new industrial units, existing units undergoing expansions, and the emergence of a new ceramic cluster at Aniyari (potential of ~0.5mmscmd). The Supreme Court order in favor of the company for Ahmedabad rural presents prospects of 0.8-1.2mmscmd over the next two-to-three years.

* We maintain our Buy valuing on the stock to arrive at our TP of INR800 (at 28x FY24E EPS). Any underperformance in terms of EBITDA/scm or volume growth v/s our projection could pose a key risk for GUJGA.

Volumes continue to surprise

* Total volumes stood at 11.4mmscmd (7% higher than our estimate) in 3QFY22. The company is currently clocking volumes of over 10mmscmd. It has signed new contracts of ~1mmscmd in 3QFY22.

* CNG volumes were in line at 2.2mmscmd (up 41% YoY and 11% QoQ) – its highest ever CNG volumes. The company added 58/95 new CNG stations in 3Q/9MFY22. It is aiming at additional CNG stations of ~150 in FY22.

* PNG Industrial/Commercial volumes stood at 8.6mmscmd (9% higher than our estimate, down 8% YoY and 3% QoQ). Volumes at Morbi stood at 6mmscmd in 3QFY22 and is currently at 5.2mmscmd v/s its peak of 7.5mmscmd.

* PNG Domestic volumes stood at 0.7mmscmd.

* EBITDA/scm stood at INR2.3 (est. INR2.8, v/s INR4 in 2QFY22) – the lowest ever. Abnormally high LNG price volatility impacted margin. However, there are some signs of softening in prices.

* Gross margin stood at INR4.6/scm (down from INR6.1/scm in 2QFY22, est. INR5.3/scm) EBITDA came in at INR2.4b (13% lower than our estimate, -61% YoY), with PAT at INR1.2b (-69% YoY). It translated to an EPS of INR1.8 (est. INR2.1).

* EBITDA fell 10% to INR13.8b, with PAT at INR8.4b (-9% YoY) in 9MFY22.

* EBITDA/scm stood at INR4.7 v/s INR6.3 in 9MFY21. Total volumes rose 29% YoY to 32.8mmscmd.

* CNG volumes increased by 62% YoY to 5.7mmscmd.

* PNG Industrial/Commercial volumes rose 26% YoY to 25.2mmscmd.

* PNG Domestic volumes grew 3% YoY to 1.9mmscmd.

Valuation and view – maintain Buy

* GUJGA added 58/95 new CNG stations in 3Q/9MFY22. It is on course to add 150 CNG stations in FY22, taking its total to over 700 stations, resulting in more CNG stations than IGL. With infrastructure in place, it will be the biggest beneficiary of any directive on Green Tax by MoRHT (our report) as Gujarat has no government directive on the use of CNG yet.

* The transfer of the Amritsar and Bhatinda GAs to GUJGA from GSPL has been completed in Nov’21 (for INR1.54b). Bhatinda has huge potential for Industrial gas consumption.

* GUJGA has the best RoCE profile of 33-35%. We expect a FCF generation of ~INR36b over FY22-24E. The company is likely to turn net cash in FY22, despite capex plans of INR30b over FY22-24E.

* We maintain our Buy valuing on the stock to arrive at our TP of INR800 (at 28x FY24E EPS)

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