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Strong margins shore‐up earnings   

Result Highlights‐ Above Estimates  

* 1QFY22 Profitability: The Operating profit and PAT for the quarter stood at Rs 7.2bn (+30% QoQ) and Rs 4.8bn (+36% QoQ), making GUJGA one of the few companies to report sequential improvement in profitability, despite Covid related drop    in sales volume (‐17.5% QoQ). However, a QoQ 7% lower gas cost on availability of cheaper domestic gas helped GUJGA record better margins.  

* Gas Sales: Total gas sales stood at 10mmscmd (‐17.5% QoQ), with  Industrial at 7.8mmsmcd (‐19% YoY); CNG: 1.55mmsmcd (‐9% YoY) ; PNG Domestic: 0.6mmscmd (‐19% YoY) and  PNG commercial at 0.09mmscmd (‐21% QoQ). The sale in Morbi region, in particular stood at 5.6mmscmd, during 1Q, which has since recovered to ~7mmscmd.

* Per unit metrics: The Gross spread and EBITDA per unit stood at INR 10.4/scm (4QFY21: 7.0/scm) and INR 7.9/scm(4QFY21: 5.1/scm), respectively, closer to the highs last seen in 2QFY21. GUJGA received 0.7mmscmd of KG‐D6 gas from RIL and 1.33mmscmd of natural gas from Cairn, offsetting the requirement for expensive LNG, which helped in 7% QoQ reduction in gas cost, aiding margins, along  with ‘full quarter’ impact of price increase taken in Feb’21.  

* Network expansion continues: During the quarter the company added 11 new CNG stations.

View & Valuation

GUJGA’s earnings in 1QFY22, stood above our and street estimates, primarily driven by very strong per unit EBITDA at Rs 7.9/scm, as benign gas cost and price increase undertaken in Feb’21 came together during the quarter.   

While Covid=2nd wave impacted sales, the volumes as we write have recovered to ~ 12mmscmd (1Q: 10mmscmd). Premised upon a strong recovery in sales volume in Jul’21 and robust margins in 1Q, while we have revised our estimates upwards [volume by 3‐7%   and margin by 5‐6%] for FY22e/23e/24e.  

Going ahead however, sustainability of strong margins appears challenging along with traction in volumes, on anticipation of increase in gas cost for GUJGA. While the price of Brent linked LNG contracts are expected to increase due to higher Brent prices, the domestic gas prices are also expected to be revised upwards by at least 50‐60%, Oct’21 onwards, even as spot LNG prices are already trending high (~USD 14/mmbtu vs USD 9‐10/mmbtu in 1Q).  In that backdrop, our estimates suggest that GUJGA might need to take a price revision of Rs 5‐6/scm, in‐order to maintain margins in the guided range of Rs 4.5‐5.5/scm.  

GUJGA has had a 20% up‐move since our ADD recommendation (Jun’21) and we find the stock trading at expensive valuation of 23x FY24e, factoring in ~ 10% p.a. growth in volume and more Rs 6/scm of margins over next decade.  

We therefore downgrade our rating on GUJGA to REDUCE (from ADD), even as we upgrade our TP to Rs 660 (from Rs 565/sh) based on a) revision in earnings and b) as we roll estimates to FY24e.

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