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Weaker performance on lower volumes and EBITDA spreads

Our View

Gujarat Gas' Q3FY24 results fell short of expectations due to lower volumes and weaker EBITDA spreads. Volumes missed estimates at 9.16 mmscmd, while the EBITDA spread of Rs 4.8/scm was significantly lower than anticipated. This weaker performance stemmed primarily from higher gas costs exceeding price hikes and limited availability of priority allocated gas. We retain our Add rating on the stock with a revised target price of Rs 660/share.

Result Highlights

* Performance: The company reported volumes of 9.16mmscmd, lower than our estimates of 9.51mmscmd. The EBITDA spread at Rs4.8/scm was significantly lower than our expectation of Rs 6/scm. Compared to our and consensus, the performance is weak attributed to poor EBITDA spreads on higher gas costs. EBITDA/PAT was Rs4bn/2.2bn, down 31%/41% YoY on weaker spreads, QoQ down by 19%/26%, despite price hikes at Morbi on higher gas costs and lower availability of priority allocated gas.

* Volumes at 9.16mmscmd were up 25.7% YoY but down 1.7% QoQ. CNG volumes were 2.78mmscmd (at quarterly high) up 14.4% YoY, 6.1% QoQ. D-PNG volumes at 0.71mmscmd were up 6% YoY, 1.4% QoQ. Industrial volumes were lower at 5.53mmscmd (Morbi assumed at ~3.65mmscmd) up 36.5% YoY but down 5.6% QoQ.

*  Margins: The gross margin at Rs8.38/scm down 36% YoY, 9.3% QoQ despite price hikes at Morbi as it was unable to cover increased gas cost. Opex was Rs3.05/scm; vs Rs3.43 a year ago and Rs2.85 the previous quarter. Gas cost. The average blended gas cost was at Rs 38.2/scm (USD12.8/mmbtu) higher than our expectations of USD12.4mmbtu, on higher-than-expected spot LNG price. EBITDA/scm was Rs4.8, down 46% YoY, 18% QoQ, impacted by a larger increase in gas costs.

* Connections: The company added 38,000 new domestic customers, 197 commercial, and 69 industrial customers in the quarter. The company operates in CNG with over 815 stations. 

* New gas sourcing contract: The company has contracted 0.5mmscmd of priority sector domestic gas under an auction for 4-years from an upstream player. 

* Capex target for FY24 at Rs 10bn of which Rs 6bn already invested.

* 9MFY24 performance: EBITDA/PAT was at Rs 12.9/7.3bn vs Rs 18.3/11.6bn last year same period. The volumes at 9.23mmscmd (vs 8.19 last year same period), of which CNG was at 2.67mmscmd vs 2.37 last year. The EBITDA spread was at Rs 5.1/scm vs 8.1 last year same period.

Valuation

Given robust cashflows and reasonable capex the company is rapidly de-levering and maintaining a strong RoCE. We forecast spreads of Rs/scm 5.8/7.1/7.3 for FY24/25/26. The stock trades at fair 24x/21.1x FY25e/26e PER. We value it on a PER basis assigning a 24x multiple and, believing it to be slightly undervalued, recommend an ADD with a revised target price of Rs 660/share.

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