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Ecstatic margins; unlikely to sustain

* Gujarat Gas (GUJGA) reported a beat on our numbers, driven by betterthan-estimated EBITDA/scm (INR7.9), while volumes were in-line (at 10mmscmd, with Morbi at 5.6mmscmd). The gross margin stood at INR10.4/scm (v/s our estimate of INR7.8), led by lower gas costs. In 1QFY22, GUJGA began procuring 1.33mmscmd of gas from the Barmer field in Rajasthan (in addition to 0.67mmscmd gas from the KG Basin in the previous quarter). Thus, long-term gas sourcing for the company stands at 6mmscmd (v/s 4.2mmscmd earlier).

* However, owing to the current spike in Brent and spot LNG prices (JKM forward curve at USD15–16/mmbtu v/s USD10 in 1QFY22), the gross margin for 2QFY22 would face downward pressure – if no price hike is taken by the company. GUJGA has been agile in its pricing strategy in line with alternative fuel prices; although, conservatively, we estimate EBITDA/scm of INR4 for 2QFY22.

* The streak of quarterly EPS revisions continues, with 1QFY22 being the sixth consecutive quarter of EPS upgrades. Volumes recovery post the last two lockdowns has been the quickest for GUJGA (current volumes at 12mmscmd, with Morbi at 7.1mmscmd), and we continue to reiterate our optimism on the company’s volume growth (triggers highlighted below).

* In line with the same, assuming volumes of 14.8/16.3mmscmd for FY23E/FY24E (a 20% CAGR over FY21–24E) and EBITDA/scm normalization at ~INR5.5/scm, we revise up our EPS by +12%, translating to EPS of INR29.0/32.5 for FY23E/FY24E. Furthermore, (a) the addition of 60+ new industrial units at Morbi over the next year, with current units undergoing expansion, and (b) the emergence of a new ceramic cluster at Aniyari (potential of ~0.5mmscmd) could result in a volume growth surprise.

* The aforementioned aptitude of the company has also resulted in the stock price posting a run of 43% in the last two months (i.e., since the last quarterly earnings) and 155% in the last year.

* We upgrade our PE multiple from 24x to 28x owing to continued strength in volume pickup and EBITDA/scm. We maintain Buy, with TP of INR860. However, we highlight that any underperformance in terms of EBITDA/scm or volume growth v/s our projection could be key risks for the stock.

Volumes in-line; EBITDA/scm expands on lower gas cost

* Volumes were in-line at 10mmscmd (-17% QoQ, impacted by the second wave).

* CNG volumes stood at 1.5mmscmd (-9% QoQ).

* PNG household stood at 0.6mmscmd (-19% QoQ).

* PNG I/C came in at 7.9mmscmd (-19% QoQ).

* The company reported revenue in line with estimates at INR30.1b (-12% QoQ).

* EBITDA stood at INR7.3b (+44% est.), with EBITDA/scm at INR7.9 (v/s our estimate of INR5.5; +61% YoY / +56% QoQ).

* PAT stood at INR4.8b (+36% QoQ).

Valuation and view

* The company added 11 new CNG stations in 1QFY22. GUJGA plans to add 150 CNG stations in FY22, taking the total to 700+ stations (resulting in more CNG stations v/s IGL). With the infrastructure in place, GUJGA would be the biggest beneficiary of any directive on Green Tax by MoRHT (refer to our report) – as Gujarat has no government directive on the use of CNG yet.

* PNGRB recently granted authorization to transfer Amritsar and Bhatinda Gas from GSPL to GUJGA. Bhatinda has huge potential for industrial gas consumption.

* GUJGA has the best RoCE profile of 34–38% and expected FCF generation of ~INR48b over the next three years. The company would supposedly turn net cash in FY22, despite capex plans of INR30b over FY22–24E. Maintain Buy.

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