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Bold move to protect margins

* Spot LNG prices surged to as high as USD35/mmBtu for Jan’22 delivery. To combat this impact, GUJGA took price hikes of INR9.5/scm in PNG-industrial and INR16/scm in PNG-commercial.

* Since domestic gas prices rose to USD2.9/mmBtu (GCV) from USD1.8/mmBtu, the company also took a hike of INR2.5/kg in CNG.

* Contrary to earlier instances, the pricing strategy surely confirms the management’s resolve to protect EBITDA/scm at INR4.5–5.5/scm. We reiterate Buy on GUJGA with Target Price of INR850/share.

Spot LNG prices wreaking havoc

* Spot LNG prices have risen to USD35/mmBtu for Jan’22, from lows of USD2/mmBtu in May 2020. Low gas prices, coupled with low oil production and associated gas production, resulted in low gas inventory across the globe.

* A severe winter in the US further worsened supply, resulting in spot LNG prices surging to USD32/mmBtu in Jan’21. However, as the production of associated gas rose, prices soon fell to USD10/mmBtu.

* However, an unusually hot summer in Europe, coupled with low supply from Russia and Norway, resulted in European gas inventory declining to 50% full, compared with 80% full a year ago. Meanwhile, delays reported at LNG terminals forced the current spike in spot LNG prices.

GUJGA hikes gas prices

* Owing to high spot usage in its mix, GUJGA has taken hikes of INR9.5/scm in its PNG-industrial and INR16/scm in PNG-commercial. Unless LNG prices rise sharply hereafter, management’s margin guidance at INR4.5–5.5/scm would be well-protected.

* After the shutdowns implemented by some consumers in 2QFY22, sales volumes at Morbi appear to be back at 6.5–7mmscmd. Even after the hike, PNG-industrial is the cheapest green option available in Morbi. However, the hike may result in some pressure on sales volumes in the near term.

* Nonetheless, we reiterate the volume potential for GUJGA remains the best among the CGDs owing to its highest exposure in the Industrial segment. The recent Supreme Court order in favor of the company for Ahmedabad rural further presents the prospect of 0.8–1mmscmd over the next 2–3 years.

Valuation and recommendation – maintain Buy

* The sharp hike in gas prices by GUJGA clearly indicates the company would try to protect its margins even in adverse situations. On the contrary, since CNG impacts the lower strata of the economic population, we expect margin contraction in the CNG segment for all CGDs.

* Gujarat is home to five industrial clusters, classified as ‘severely/critically polluted’ in terms of air pollution. As we emerge from the COVID pandemic, we expect to see stricter norms implemented in these industrial clusters, which may raise GUJGA’s volume prospects.

* GUJGA trades at 22x FY23 EPS. On strong volume prospects, we value the company at 28x Sep’23 EPS; we re-iterate Buy, with TP of INR850.

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