Buy Gujarat Gas Ltd For Target Rs.535 by Motilal Oswal Financial Services Ltd
Morbi slowdown emerges as a key concern
* Gujarat Gas (GUJGA)’s EBITDA was in line, as overall volumes and EBITDA/scm came in line with our estimates. The impact of APM twin deallocation was visible as margins contracted INR2.1/scm QoQ. Spot LNG prices have remained high, averaging ~USD14/mmbtu, over the past four months, and are expected to remain elevated in the medium term.
* Margins are likely to remain under pressure in 4QFY25 amid high spot LNG prices, as the APM shortfall is likely to be ~47-48% in 4Q (vs. 45% in 3Q). Further, with Propane vs. PNG delta at Morbi being ~INR4/scm now (in favor of Propane), management expects a ~0.5mmscmd dip in Morbi volumes in 4Q.
* GUJGA currently trades at 26.8x 1Y fwd. P/E. We reiterate our BUY rating on the stock with a TP of INR535, valuing it at 28x Dec’26E EPS
Margin guidance downgraded; 4Q Morbi volumes under pressure
* In the 2QFY25 earnings call, management revised its EBITDA margin guidance up to INR5-INR6 per scm. However, amid the recent APM deallocation and elevated spot LNG prices, management downgraded its margin guidance back to INR4.5-INR5.5 per scm. We retain our EBITDA/scm assumptions of INR4.3/scm for 4QFY25 and INR5.4/scm for both FY26/FY27.
* With spot LNG prices averaging above USD14/mmbtu during the last few months, GUJGA had taken an INR2/scm industrial gas price hike in 3Q. While PNG prices stood at INR47/INR49 per scm in Morbi/non-Morbi regions, propane costs were ~INR43/scm. Hence, management foresees a volume dip of ~0.5mmscmd in 4QFY25.
Other key takeaways from the conference call
* In 4QFY25, the APM shortfall shall be 47-48%, as the twin deallocation will now have an entire quarter’s impact.
* Management guided a capex of INR8.5b/INR10b for FY25/FY26. In 3QFY25, GUJGA incurred a capex of INR2.2b.
* GSPC booked PAT of INR8.9b in 1HFY25, with volumes of 11-12mmscmd.
* Under the F-DODO scheme, 50 agreements were signed. Hence, more than 50 stations would be commissioned within one year. Further, 50 more agreements shall be signed in 4QFY25.
EBITDA in line; volumes rise QoQ
* In 3QFY25, GUJGA’s EBITDA stood at INR3.8b, in line with our estimates (-5% YoY). Both overall volumes and EBITDA/scm came in line with our estimate at 9.5mmscmd and INR4.4, respectively. 3QFY25 showed a QoQ recovery in volume, driven by an 11% growth in the PNG I/C segment. The impact of the APM twin deallocation was visible as the margin contracted INR2.1/scm QoQ. We note that spot LNG prices were high, averaging USD13.9/mmbtu in 3Q (up 7% QoQ), and have continued to remain elevated in 4QFY25YTD, averaging USD14.1/mmbtu.
* Revenue stood at INR41.5b (est. of INR41.2b, up 6% YoY).
* Overall volumes in 3QFY25 came in at 9.5mmscmd, in line with our estimate.
* EBITDA also came in line with our estimates, at INR3.8b. EBITDA/scm stood at INR4.4 (vs. our est. of INR4.3, down 32% QoQ).
* PAT stood at INR2.2b (est. of INR1.9b, up 1% YoY).
* The variance at the PAT level was driven by other income surpassing our estimates.
* The company has added ~38.2k new domestic customers and five new CNG stations.
* The commissioning of new industrial customers has driven a volume of ~172,000scmd.
* The company added 771km of gas pipelines during the quarter, bringing the total to ~42,000km.
* In 9MFY25, revenue/EBITDA/PAT grew 7%/11%/17% YoY.
Valuation and view
* 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 newly acquired areas in Rajasthan.
* The stock is trading at a P/E of 26.8x FY26E and EV/EBITDA of 14.6x for FY26E. We reiterate our BUY rating on the stock with a TP of INR535, valuing it at 28x Dec’26E EPS.
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