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Strong margins drive profitability

About the stock: Gujarat Gas is one of India’s largest city gas distribution companies with highest sales volume among listed peers.

* Sales volume grew at 15% CAGR in FY17-21 driven by industrial PNG

* The company benefitted from NGT order for Morbi industrial area

Q1FY22 Results: Gujarat Gas reported results that were better than estimates on account of better realisation and low gas costs.

* Revenue was up 178% YoY to | 3010.9 crore (estimate: | 2870.5 crore) driven by 141.6% growth in volume to 10 mmscmd on a lower base

* Gross margins at | 10.4/scm were well ahead of estimated margins of | 8.1/scm due higher realisation and lower gas costs. Subsequently, EBITDA came in at | 722.9 crore, up 289.2% YoY (estimate: | 509 crore)

* PAT was at | 476.2 crore, up 711.7% YoY (estimate: | 320.5 crore)

What should investors do?

Gujarat Gas’ share price has grown by ~2.5x over the last one year (from ~| 300 in August 2020 to ~| 730 levels in August 2021).

* On account of the sharp run up in stock price, we downgrade our rating from BUY to HOLD on the stock

Target Price and Valuation: We value GGL at | 735 i.e. 28x P/E on FY23E EPS

Key triggers for future price performance:

* Strong volume growth in industrial PNG segment driven by Morbi industrial volume. Steady growth in CNG, domestic PNG to support volume growth

* Better pricing power and regulatory tailwinds over long term

* In the medium term, higher gas prices to reduce margins from current level (Q1FY22).

Alternate Stock Idea: Apart from GGL, in our oil & gas coverage we also like MGL.

* MGL is a beneficiary of India’s increasing gas demand and will continue to grow on account of steady volume growth, better pricing power and favourable regulatory scenario

* BUY with a target price of | 1,340

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