Buy Gujarat Energy DM Ltd For Target Rs.325 by Motilal Oswal Financial Services Ltd
Morbi volume outlook remains weak; valuations inexpensive
* Gujarat Energy’s city gas distribution (CGD) volumes were 12% above our est. at 10.7mmscmd (up 24% YoY). CNG volumes were in line with our est., while I&C-PNG volumes were 25% above our est. Third-party gas trading volumes stood at 4.7/3.3mmscmd in 2QFY27/1QFY27. EBITDA/scm margin for the CGD business stood at INR4.7/scm. Gas trading EBIT increased 89% YoY (down 55% QoQ), while CGD segment EBIT fell 5%/28% YoY/QoQ. EBITDA came in line with our est. at INR8b.
* Things we liked about the result:
1) Overall CGD volumes grew 24% YoY as I&C-PNG/CNG volumes grew 38%/11% YoY in 2QFY27
2) The Board approved two Henry Hub-linked LNG contracts aggregating ~0.8mmtpa for up to 10 years at USD7-9/mmbtu (DES), with supplies from CY28, aimed at regaining lost Morbi customers and improving competitiveness against propane; the company targets a net contracted portfolio of ~4mmtpa and 60-70% long-term coverage of gas sales over the next two years; 3) Fertilizer contracts remained profitable, and management maintained its gas trading margin guidance of 5-6%; 4) The balance sheet remains strong, with net cash of ~INR70b as of Sep’26.
* Key monitorables:
1) The current Morbi run-rate has dropped to ~1mmscmd from ~3.8mmscmd in 2QFY27, as propane retains a pricing advantage of ~INR7-8/scm over natural gas
2) CGD EBITDA/scm remains below management’s guidance of INR5-6/scm
3) The ramp-up of non-Morbi I&C volumes toward the 3mmscmd target over the next 1.5 years
4) With 1HFY27 capex at INR3.1b, a sharp 2H step-up is needed to meet the FY27 guidance of ~INR10b.
* Valuation and view:
The stock currently trades at 9.3x FY28 P/E. We reiterate our BUY rating on the stock with a SoTP based TP of INR325/sh. In our SoTP based valuation, we value:
1) the city gas distribution segment at 8x FY28E EV/EBITDA (INR164/sh), largely in-line with FY28 target EV/EBITDA for MAHGL/IGL
2) the gas trading segment at 4.5x FY28E EV/EBITDA (INR48/sh)
3) add FY28E net cash balance (INR94/sh)
4) investment in subsidiaries, associates, and JVs at 0.8x P/B (INR18/sh).
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