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Higher-than-expected margin drives beat

* Gujarat Gas (GUJGA)’s 2QFY24 EBITDA, at INR5b, beat our estimate due to 39% higher-than-estimated EBITDA/scm. The 2Q EBITDA/scm was at INR5.8. Total volumes, at 9.3mmscmd, came in line with our estimate.

* Morbi volumes stood flat sequentially at ~4mmscmd in 2QFY24, and management expects the volumes to remain at similar levels over the next few months. The total market size of Morbi stood at ~8.0-8.5mmscmd.

* GUJGA aims to strike a balance between volume growth and margins. The company targets to improve its volume by 10% YoY while also maintaining EBITDA/scm in the INR4.5-INR5.5 range.

* We cut our revenue estimate by 7% and EBITDA/PAT estimates by 9% each for FY25 as we rationalize our estimates taking into account the slow nearterm growth in Morbi and updated medium-term volume growth guidance.

* GUJGA’s long-term volume growth prospects remain robust, with the addition of new industrial units and expansion of existing units. Hence, we reiterate our BUY rating on the stock with a TP of INR485 (based on 26x FY25E EPS). A poor ceramic outlook or a sustained discount of propane/LPG to natural gas can pose a key risk to GUJGA.

Volumes in line; EBITDA/scm rises to INR5.8

* Total volumes stood at 9.3mmscmd (in line with our estimate of 9.7mmscmd). CNG volumes at 2.6mmscmd rose 13% YoY, aided by investments in CNG infrastructure and favorable government policies. PNG I/C volumes stood at 6mmscmd (+30% YoY).

* The company added 221 commercials and 61 new industrial customers during the quarter. Cumulative volume stood at ~83,000scmd. The company has a signed volume of 542,000scmd yet to be commissioned.

* PNG domestic volumes were at 0.7mmscmd (+1% YoY). The company added ~53,000 new domestic customers during the quarter.

* Gross margin stood at INR9.2/scm (down from INR13/scm in 2QFY23). EBITDA/scm came in at INR5.8 (est. of INR4.2). Thus, EBITDA was at INR5b (est. of INR3.7b, -23% YoY) during the quarter.

* PAT was at INR3b (est. of INR2b, -26% YoY) in 2QFY24

* For 1HFY24, revenue stood at INR76b (-17% YoY), EBITDA was at INR8.8b (- 29% YoY) and PAT stood at INR5.1b (-35% YoY). EBITDA/scm was at INR5.2 (- 35% YoY) with total volumes at 9.3mmscmd (+7% YoY).

* GUJGA’s 1HFY24 EBITDA was 46% of our full-year estimate for FY24.

Valuation and view

* The capex guidance stands at INR10-12b annually over the next two years and will be split equally among new GAs, old GAs and CNG. The company will be adding ~60-70 new CNG stations annually over the next two years.

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

* We reiterate our BUY rating on the stock with a TP of INR485, valuing it at 26x FY25E EPS. A poor ceramic outlook or a sustained discount of propane/LPG to natural gas can pose a key risk to GUJGA.

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