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Stronger propane prices drive another Morbi price hike by Gujarat Gas

Gujarat Gas (GUJGA) has hiked industrial gas prices at Morbi by INR 2.5/scm, the second hike in Q2, post a INR 2/scm hike taken in Aug’23. The decision has been driven by an improvement in propane prices in last 2-3 months. Prices have steadily improved since then, with Aug’23 prices at USD 470/t and Sep’23 prices declared at USD 550/t – coupled with an increase in import duties to ~18% from <6% earlier. GUJGA industrial prices are now at a discount to propane for the first time in 6 months. While this pricing strength is welcome and helps protect volumes in the critical Morbi region (43% of total GUJGA volumes), vulnerability of volumes to alternate fuel prices remains high, while slower than expected development from new areas is a return-dilutive concern. We raise our FY24E/FY25E EPS by 4.1%/1.1%, but reduce the target price by 2%. Reiterate HOLD.

Stronger propane prices a relief

Propane has become a key alternative for gas in the region of Morbi for GUJGA, with ~45% of operational units at the Morbi ceramic hub now equipped with the capability to use either gas or propane (up from barely 20% in FY22). With the sharp weakness seen in propane prices from Q3FY23, pricing power for GUJGA has remained constrained; this has reflected in gross margins for the company steadily softening from the high of INR 13/scm in Q2FY23 to INR 8.2/scm in Q1FY24. Strengthening of propane prices Aug’23 onwards is therefore a welcome positive with a USD 70/t price improvement seen MoM during the month and a further USD 80/t hike announced by Saudi Aramco for Sep’23. This in turn has allowed GUJGA to finally enforce a price hike of INR 2/scm in Aug’23 and a further INR 2.5/scm for Sep’23 without impacting price competitiveness and keeping volumes relatively secure.

Structural risks remain unchanged

While the relief from stronger propane prices is a positive for Morbi, vulnerability to sudden price fluctuations remains material and will likely grow as more units enable dual fuel use. The relatively slower traction being seen from the 20 areas added to / being added to GUJGA portfolio over the last 3- 4 years despite capex run-rate going up to INR 12bn-13bn p.a. over FY22- FY24E vs INR 6bn over FY18-FY21, is a dampener for return ratios as well. Reiterate HOLD.

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