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Result Highlights‐ Ahead of estimates   

* 1QFY22 Profitability: The Operating profit and PAT for the quarter stood at Rs 3.7bn (+8.2% YoY; +8.8% QoQ) and Rs 2.3bn (+17% YoY; 12.2% QoQ), respectively, ahead of our and street estimates. The YoY and QoQ improvement in reported earnings stemmed from 10.6% YoY and 9% QoQ higher gas throughput.  

* Gas Sales: Total gas throughput stood sequentially higher at 36.8mmscmd (4Q: 33.8mmscmd), despite Covid‐2nd wave, as slack in CGD consumptions was offset by higher consumption from refineries. The sector wise volume offtake stood as follows: CGD: 11.04mmscmd (‐18% QoQ); Refineries: 11.77mmscmd (+58% QoQ); Fertilizer: 2.58mmscmd (‐15% QoQ); Power: 5.52mmscmd (+16%QoQ); and Others: 5.9mmscmd (+16% QoQ). Availability of cheaper domestic gas from RIL’s KG ‐D6 field helped boost gas consumption by the refinery segment. As we write the gas transmission has improved further to 39mmscmd (of which RIL’s KG D6 gas supply is ~12mmscmd) on backs of normalization of gas consumption from CGD sector.

* Per unit metrics: The per unit revenue for the quarter stood at 1.54/scm (+3% YoY, +2%QoQ), practically flat in YoY and QoQ basis.

View & Valuation

GUJS’ reported earnings in 1QFY22 stood ahead of estimates, on account of higher than estimated gas throughput at 36.8mmscmd, primarily on stronger (58% QoQ) consumption by refineries, even as the consumption in CGD space dropped by 18% QoQ, in sync with our expectations, in the back drop of Covid‐2nd wave.  

We maintain our BUY rating on GUJS, with a revised TP of Rs 400/sh (from Rs 345/sh) as we a) roll estimates to FY24e and b) account of increase in market value of GUJS’s investment in GUJGA. Of the ~ Rs 55/sh change in our TP almost ~30% change is on account of change in GUJS’ fair value and ~70% is on account of change in market value of GUJGA.  

Post 4QFY21 earnings report in Jun’21, while GUJGA has generated 34% return, GUJS has returned just 17%. As per our assestment, market at present is ascribing a 60% holding dicount to the investment in GUJGA (evaluated on 3M average market price), as againts our estimate of 40% discount.  

Our SOTP valuation of Rs 400/sh involves a)  valuing the standalone business at Rs 135/sh, implying a core P/E of 8.9x FY24e (SA), b) the investment in GUJGA at Rs 248/sh valued  at 40% discount to 3M average market price, c) investment in Sabarmati gas at 3.0x FY20 BV and d) investment in under‐construction trunk pipelines GIGL & GITL at 30% discount to FY20BV.   Key risk to our estimates/ recommendation stems from higher than estimated  (‐20%) revision in GUJS’s transmission tariff in FY22e and onwards.

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