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Headwinds to volumes and margins, probably short-term

Q4FY21 standalone EPS of Gujarat Gas (GGL) is up 42% YoY driven by rise in EBITDA margin and surge in volumes to a record high. FY21 recurring EPS is up 39% YoY driven by 29% YoY rise in EBITDA margin; volumes fell 0.5% YoY due to covid impact in Q1. FY22-TD volumes are down to ~10mmscmd hit by covid second wave. Once restrictions are lifted, volumes are likely to rebound above Q4FY21 level. Surge in spot LNG is a headwind for margins though QoQ rise in margins in Q1 appears likely. We have raised FY22E volume and margin estimates leading to an upgrade in FY22E EPS by 17% and target price by 19% to Rs564 (4% upside). We downgrade GGL to HOLD (from Buy) given likely shortterm headwinds to volumes due to covid and to margins due to strong spot LNG.

Q4 EPS up 40% YoY on surge in volumes and margin rise:

Q4FY21 standalone EPS is up 42% YoY (consolidated up 40% YoY) driven by 8% YoY rise (13% QoQ fall) in EBITDA margin to Rs5.08/scm and 22% YoY surge in volumes to a record high of 12.13mmscmd. EBITDA margin was down QoQ hit by surge in spot LNG prices, but was well above our estimate and so were volumes. 25% YoY (5% QoQ) rise in industrial volumes to an all-time high of 9.58mmscmd was the main driver of volume growth. Domestic PNG and CNG volumes were up 10-15% YoY (12-8% QoQ), but commercial volumes were down 9% YoY (up 11% QoQ). FY21 recurring consolidated and standalone EPS are up 39-40% YoY driven by 29% YoY rise in EBITDA margin to Rs6.09/scm. FY21 volumes were down 0.5% YoY due to 55% YoY fall in Q1 volumes; Q2-Q4 volumes rose 16% YoY. CNG and commercial volumes declined 13-29% YoY, but industrial and domestic were 1-13% YoY higher.

Raise FY22E EPS and target price by 17-19%:

FY22-TD volumes are down to ~10mmscmd from 12.13mmscmd in Q4FY21, hit by restrictions due to covid. Spot LNG surged from Mar’21 lows, but is still down QoQ and, along with full benefit of price hike for industrial consumers from 1-Feb’21, is likely to lead to QoQ rise in EBITDA margin. High spot LNG price remains a concern. We have raised our FY22E margin and volume estimate by 5-6%, which has led to an upgrade in FY22E EPS by 17% and DCF-based target price by 19% to Rs564/share (4% upside).

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