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Volume outlook stays positive

* Gujarat Gas’s (GUJGA’s) EBITDA was above our estimate at INR5.9b as both margins and volumes were on the higher side. EBITDA/scm for the quarter stood at INR6.7/scm. Total volumes stood at 9.7mmscmd.

* Management emphasized its confidence in achieving an annualized volume CAGR of ~10% p.a., despite experiencing a recent shortfall in APM allocation of 20-30%. Its optimism stems from 1) positive response received to the new pricing scheme aimed at reducing gas volatility, as evidenced by expressions of interest (EOI) from customers in Morbi and Surendranagar, 2) signing of an MoU with OMCs offers a new avenue for growth, 3) sustained robust growth momentum in CNG as evident in 4QFY24 results.

* Other key takeaways from the conference call included: 1) FY25 capex was guided at INR100b vs. ~INR84b in FY24, 2) overall APM shortfall in FY24 averaged 16%, but has risen to 28% in 4QFY24, 3) GUJGA could look to offer similar EoI schemes to industrial customers outside of Morbi as well in a bid to protect market share.

* We decrease our EBITDA/PAT estimates by 2%/5% and 2%/6% for FY25 and FY26 as we revise our margin assumption downwards to INR6.2/scm for FY25/26.

* 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 INR650 (at 28x FY26 EPS).

EBITDA beat as margin and volume strong

* GUJGA reported robust results with EBITDA and PAT exceeding our estimates by 27%/54%. This outperformance can be attributed to several factors: 1) Overall volumes in 4QFY24 exceeded our estimates by 4%, 2) EBITDA/scm margin surpassed our estimates by 22% 3) results were boosted by INR557m due to provisions written back related to previous quarters, specifically for trade margin on CNG sales, following a settlement with oil marketing companies.

* Adjusted for provisions written back, PAT was 38% above our estimate.

* Total volumes were 9.7mmscmd (in line with our estimate of 9.4mmscmd).

* CNG volumes at 2.9mmscmd (+14% YoY) continue to witness strong momentum and have steadily climbed up from 2.5 mmscmd in 4QFY23.

* PNG I/C volumes reached 6mmscmd (our est. 5.7mmscmd, +8% YoY). GUJGA added 271 commercial and 76 new industrial customers during the quarter. Additionally, the commissioning of new industrial customers added a volume of 2,79,000scmd. GUJGA has also secured a signed volume of 7,70,000scmd, scheduled for commissioning in the coming days.

* PNG domestic volumes stood at 0.9mmscmd (our est. 0.8mmscmd, +2% YoY). The company added ~50.8k new domestic customers during the quarter.

* EBITDA/scm came in at INR6.7 (est. of INR5.5/scm). Gross margin stood at INR10.8/scm (up from INR10.6 in 4QFY23). Thus, EBITDA stood at INR5.9b (est. of INR4.7b, 5% YoY).

* PAT was at INR4.1b (est. of INR2.7b, 11% YoY).

* We have a BUY rating on GUJGA with a target price of INR650.

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 P/E of 23.5x FY26E and EV/EBITDA of 13.6x for FY26E. We reiterate our BUY rating on the stock with a TP of INR650, valuing it at 28x FY26E EPS.

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