Buy Gujarat Gas Ltd For Target Rs. 580 By JM Financial Services
Earnings beat on higher margin and tad better volume
Gujarat Gas’ (GGas) 4QFY25 standalone EBITDA, at INR 4.5bn, was higher than JMFe/consensus of INR 4.0bn/INR 4.1bn due to higher than expected gross margin (and also higher EBITDA margin despite higher opex) and slightly better volume (0.8% above JMFe) led by domestic PNG volume. Gross margin was higher at INR 10.1/scm in 4QFY25 vs. JMFe at INR 8.8/scm; however EBITDA margin beat was lower at INR 5.4/scm vs JMFe of INR 4.8/scm due to jump in opex. Further, overall volume was also 0.8% above JMFe at 9.3mmscmd, led by domestic PNG volume while Industrial and CNG volumes were largely in-line. We maintain BUY (unchanged TP of INR 580) as we expect industrial segment volume growth to be robust in the medium to long term driven by likely strengthening of competitiveness of gas vs. propane on account of moderation in spot LNG prices in the medium to long term.
* Gross margin higher at INR 10.1/scm in 4QFY25 vs. JMFe at INR 8.8/scm; however jump in opex led to beat in EBITDA margin being lower at INR 5.4/scm vs JMFe of INR 4.8/scm: The average realisation was lower at INR 49.0/scm vs JMFe of INR 49.7/scm (vs. INR 47.7/scm in 3QFY25); however average cost of gas was significantly lower at INR 38.9/scm or USD 12.5/mmbtu vs JMFe of INR 40.9 or USD 13.1/mmbtu (and vs. INR 39.4/scm or USD12.9/mmbtu in 3QFY25). Hence, gross margin was higher at INR 10.1/scm in 4QFY25 vs. JMFe at INR 8.8/scm (vs. INR 8.3/scm in 3QFY25). However, opex jumped sharply to INR 4.8/scm in 4QFY25 (vs. INR 4.0/scm in 3QFY25); hence, beat in EBITDA margin beat was lower than beat in gross margin. EBITDA margin was at INR 5.4/scm in 4QFY25 vs JMFe of INR 4.8/scm (and vs INR 4.4/scm in 3QFY25).
* Overall volume was 0.8% above JMFe at 9.3mmscmd, led by domestic PNG volume; Industrial and CNG volume largely in-line: Overall volume was 0.8% above JMFe at 9.3mmscmd in 4QFY25 (down 1.8% QoQ and down 4.0% YoY). Industrial volume was in-line with JMFe at 5.0mmscmd (down 7.9% QoQ and down 13.3% YoY); CNG volume was also largely in-line at 3.2mmscmd (up 3.2% QoQ and up 11.4% YoY). However, domestic PNG volume was higher at 80mmscm (jumped 18% QoQ on a low base, up 3.6% YoY) and commercial segment volume was in-line at 14mmscm (up 3.2% QoQ and up 11.4% YoY). Further, the company said it is aggressively pushing for FDODO model for setting up CNG station, which will help in accelerating CNG growth for the future; GGas has signed 60+ agreements with various dealers under FDODO scheme as on date, which will help in accelerating growth. During 4QFY25, the company added ~39k new domestic customers, added 3 new CNG stations (total CNG station at over 828.
* Maintain BUY as we expect GGas competitiveness to improve due to likely moderation in spot LNG price over medium to long term on significant jump in global LNG supply: We raise our FY26/FY27 PAT estimate by 2%/1% accounting for 4QFY25 results; however, our TP of INR 580 remains unchanged. We maintain BUY as we expect volume growth momentum to sustain in the medium to long term led by: a) rise in gas use in the industrial segment driven by likely improvement in competitiveness of gas vs. propane (on account of moderation in spot LNG price supply over the medium to long term due to significant jump in global LNG from 2026-27 onwards), and also due to regulatory push; and b) expansion of CNG in new GAs and limited threat from electric vehicles. We expect spot LNG prices to remain muted. At CMP, GGas is trading at 19.6x FY27 P/E and 3.1x FY27 P/B. Key risks: a) sustained high spot LNG prices and fall in propane price could pose competitive threat from propane; b) further sharp APM gas allocation cuts could pose risk to margin/volume in CNG business.
Please refer disclaimer at https://www.jmfl.com/disclaimer
SEBI Registration Number is INM000010361
