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CNG pivotal to growth; Morbi volumes slack

Morbi cluster: Morbi accounts for ~43% of GUJGA volumes, but its contribution to EBITDA is only ~10-15%. The industrial volumes tend to fluctuate in this region due to price volatility of alternate fuels (propane). Propane prices have soared internationally taking the price in Morbi region to Rs 44/scm (in comparison, PNG price is Rs 45.6/scm while price for non-ceramic customers is Rs 47.4/scm) Morbi ceramic cluster has total volume capacity of 8.5mmscmd with current volumes at ~4mmscmd; new capacities coming up in the region will boost volumes.

Other Industrial demand: The industrial volumes are ~2mmscmd from customers from pharma/chemical and textile industries. GUJGA reckons volumes could increase by another 2-3mmscmd in quick time. Any regulatory action on use of alternate fuels can boost volumes substantially. These regions earn better margins than Morbi cluster. New ceramic cluster is coming up in Aniyari having potential of 0.5mmscmd, capacity for which would be set up in due course. Industrial volumes have the potential to increase as spot LNG prices are below USD 12/mmbtu currently. if sustained, volumes could emanate from newer set of clients across diverse industries.

CNG volume contributions >25%: The number of CNG stations have increased from 403 in FY20 to 808 in FY23 of which 252 are outside Gujarat. While CNG volumes comprise 27% of total volumes and contribute significantly to EBITDA (~55-60%). The additions of stations have not resulted in similar growth in volumes, as lag of 1-2years is expected. A volume growth of ~10% is assumed sustainable in this segment, as it is also supported by highest discount to petrol/diesel, newer variants of CNG vehicles by OEMs and a VAT cut in FY23.

Gas Sourcing: Low spot LNG prices hold the key for volume rise. Company sources 4.5mmscmd of RLNG. It has contract with Rasgas (Qatar) for 1mmscmd, BG (Shell) for 2mmscmd, RIL for 0.67mmscmd, and some from Cairn & Vedanta.

Other volume growth optionality: An increase in demand from Industrial customers is attributed to stringent environmental regulations across industrial clusters. Increase in CNG network – annual additions have been more than 100 stations - would result in more vehicle conversion. As the pipeline connection is laid, increased D-PNG consumption will follow. New industrial clusters are coming up at various locations like Rajkot, Bhavnagar, Ahmedabad, Dahej, Thane, Amritsar, Bhatinda etc.

New Geographical Areas (GAs) to support growth momentum: The new GAs won in the 9th & 10th round of bidding have started contributing 0.3mmscmd in FY19 and have touched 0.5mmscmd in FY23. The MWP timeline spans 8 years, of which 3 years have passed and the current infrastructure is ahead of target.

Valuation: We believe that the company’s large geographical footprint with access to 27 GAs, increased environmental activism, lower VAT, and difference vis-à-vis alternative fuels for CNG would entail double-digit volume growth. Given robust cashflows and reasonable capex the company is rapidly de-levering and maintaining a strong RoCE. We forecast spreads of Rs/scm 5.8/6.8/7.0 for FY24/25/26. The stock trades at fair 21.1x/18.7x FY25e/26e PER. We value it on a PER basis assigning a 22x multiple and, believing it to be fairly valued, recommend a ADD with target price of Rs605/share.

Risks: Given large exposure to Morbi tile cluster, demand revival may be back-ended given its discretionary nature. Other risks: Slower volume growth, margin compression on lower difference vs alternatives, regulatory changes, sharp increase in LNG prices, sustained discount of propane to natural gas, slow infra rollout, competition from alternative fuels like EV.

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