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Morbi rebound and trading gains drive a strong 1QFY27

* Gujarat Energy Limited’s city gas distribution (CGD) volumes were in line with est. at 12.3mmscmd (up 39% YoY). CNG/I&C-PNG volumes were 3%/4% above our est. The third-party gas trading volumes stood at 3.3/4.6mmscmd in 1QFY27/4QFY26. EBITDA/scm margin for the CGD business stood at INR5.2/scm. Gas trading EBIT jumped 3x YoY (up 78% QoQ), while CGD segment EBIT stood 8%/35% up YoY/QoQ. EBITDA was 9% above our est. at INR13b.

* Things we liked about the result:

1) Morbi cluster volumes ramped up sharply from 0.4mmscmd in Apr'26 to 8mmscmd+ in May-Jun'26, taking 1QFY27 average Morbi volumes to 5.67mmscmd

2) CNG volumes came in 3% above estimate in 1Q, and management guided that CNG volume growth would remain robust at 12%+ YoY in the medium term

3) gas trading EBIT grew 3x YoY and 78% QoQ, aided by a favorable marketing margin driven by favorable sourcing economics/timing and long-term Brent-linked contracts

4) the company plans to add 75+ new CNG stations and upgrade 70+ stations in FY27, against 844 stations currently (6 added/9 upgraded in 1Q).

* Key monitorables:

1) GTL is expected to be listed by Sep’26

2) the current Morbi run-rate has moderated to ~3mmscmd (from 8mmscmd+ in MayJun'26) as propane availability improved in 2QFY27-mtd, with gas-equivalent propane sales at 5.3mmscmd; Propane is priced at INR65/scm vs PNG at INR78/scm

3) despite gas trading EBIT of INR7.2b in 1Q, management maintained its INR11-12b annual EBIT guidance for the segment; any upgrade to this guidance remains a key monitorable

4) Non-Morbi I&C average volumes stood at 2mmscmd in 1QFY27, remaining rangebound over the last few quarters; management has now guided for these volumes to reach 3mmscmd over the next 1.5 years (86 new connections added in 1Q), and the pace of ramp-up remains a key focus area.

* Valuation : The stock currently trades at 11.8x FY28 P/E. We reiterate our BUY rating on the stock with an SoTP based TP of INR360/sh. In our SoTP based valuation, we value:

1) the city gas distribution segment at 10x FY28 EV/EBITDA (INR200/sh)

2) the gas trading segment at 4.5x FY28 EV/EBITDA (INR53/sh)

3) and add FY28 net cash balance (INR87/sh)

4) investments in subsidiaries, associates, and JVs at 0.8x P/B (INR18/sh).

* Valuation and view

* The company’s long-term volume growth prospects remain robust, with the addition of new industrial units and the expansion of existing units. It is aggressively investing in infrastructure to push industrial gas adoption in Thane rural, Ahmedabad rural, and newly acquired areas in Rajasthan.

* The stock currently trades at 11.8x FY28 P/E. We reiterate our BUY rating on the stock with an SoTP based TP of INR360/sh. In our SoTP based valuation, we value:

1) the city gas distribution segment at 10x FY28 EV/EBITDA (INR200/sh)

2) the gas trading segment at 4.5x FY28 EV/EBITDA (INR53/sh)

3) and add FY28 net cash balance (INR87/sh)

4) investments in subsidiaries, associates, and JVs at 0.8x P/B (INR18/sh).

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