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Industrial volumes post big price hike key to outlook

Gujarat Gas (GGL) has hiked CNG price by Rs2.5/kg to partly pass on APM gas price rise on 1-Oct and gas price for industrial consumers by Rs9.5/scm (25%) to pass on spot LNG surge; GGL had hiked prices for industrial consumers by 13% on 24-Aug’21. At futures as of 5-Oct’21, average spot LNG is at US$34/mmbtu in Oct’21-Mar’22.

GGL’s FY22E margin would depend on its industrial sales volumes in H2FY22E; for volumes in excess of 6mmscmd, GGL would have to buy very expensive spot LNG, which would hit its margins. At H2 industrial volumes of 6- 6.5mmscmd, we estimate FY22E EPS to be up 56-27% YoY, but at 7.0-7.5mmscmd to be down 2-31% YoY. Spot LNG surge has put GGL’s strong volume growth at risk and led to margin uncertainty. We reiterate REDUCE on GGL.

* CNG price hike does not pass on entire APM gas price rise: Effective 5-Oct’21, CNG price has been hiked by Rs2.5/kg to pass on the US$1.22/mmbtu (Rs4.4/kg) HoH rise in APM gas price for H2FY22. Thus, the entire rise in APM gas price has not been passed on leading to Rs1.9/kg (Rs1.4/scm) fall in margin on CNG, which we estimate to be 17-18% of GGL’s total FY22E volumes.

* 25% gas price hike for industrial consumers suggests GGL has chosen to sacrifice volume growth to prevent steep EPS fall: Spot LNG futures as of 5- Oct’21 for Oct’21-Mar’22 are at US$31.6-35.5/mmbtu with H2FY22E average at US$34/mmbtu vs just US$13.6/mmtu in H1. Factoring spot LNG and Brent futures as of 5-Oct’21 and GGL’s price hike for industrial consumers of 25% but assuming no further price hikes, and industrial volumes at 6.0-7.5mmscmd in H2FY22E, we estimate GGL’s FY22E: 1) EPS at Rs28.9-12.8 (up 56% YoY to down 31% YoY and 17% higher to 48% lower than our estimate); 2) EBITDA margin at Rs8.5-4.0/scm (up 39% to down 34% YoY), and 3) industrial volumes of 7.1-7.9mmscmd (up 7% to down 3% YoY) and total volumes of 9.7-10.4mmscmd (up 3-11% YoY).

* FY23E outlook to depend on industrial volumes possible at current prices and severity of winter, which would determine spot LNG outlook: At latest futures, FY23E spot LNG is at US$17.6/mmbtu. However, a severe winter may mean European gas storage falls to record lows and drives FY23E Asian spot LNG price up further. FY23E spot LNG of US$19.4-20.4/mmbtu can support industrial gas volumes of 10mmscmd while ensuring EBITDA margin of Rs4.5-5.5/scm if gas price for industrial consumers is not cut. However, moot question is, at current prices can industrial volumes rebound to a new high of 10mmscmd (past peak of 9.6mmscmd).

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