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Healthy margins offset volume weakness

* Gujrat Gas (GUJGA)’s 2QFY25 EBITDA was ahead of our estimates as a strong EBITDA/scm margin offset the volume weakness. Management slightly raised its margin guidance to INR5-6/scm (from INR4.5-5.5). However, the volume guidance commentary has remained cautious, guiding 6-7% growth over the next 18-24 months. We are not too concerned about the CGD companies’ necessity to undertake CNG price hikes, given its solid price competitiveness vs. petrol.

* Following the conference call, we cut our FY26/27 PAT by 9/10%. Recovery in ceramic exports (and therefore Morbi volumes) and potential decline in spot LNG prices remain key catalysts in FY26, in our opinion.

* In 2QFY25, GUJGA reported an EBITDA and PAT, which were 10% and 17% above our estimates, respectively. The overall volume was down 4% vs. our estimate, though this was offset by the EBITDA/scm margin of INR6.4 (our est.: INR5.6). The beat at the EBITDA level appeared to be largely driven by gas cost optimization, as gross margin expanded from INR8.6/scm in 1QFY25 to INR10.4/scm in 2QFY25. In 3QFY25, we expect a recovery in volumes QoQ as 2Q volumes were hit by seasonality at Morbi.

* Management guided for an annualized volume CAGR of ~5-7% p.a., despite experiencing a recent shortfall in APM allocation of 26% in 2Q, which has now risen to ~50%. Management expects EBITDA/scm to range between INR5 and INR6 going forward. Management also highlighted: 1) a 12%/25% YoY increase in CNG volumes during 2Q in Gujarat/outside Gujarat, 2) expectation of a pickup in Morbi volumes driven by a decrease in PropanePNG price differential, 3) hydrogen blending pilot project – completed successfully with 8% blending, and 4) F-DODO station commissioning, which is likely to start from 4QFY25.

* Other key takeaways from the conference call:

* Management expects volume from Morbi to be ~3.5mmscmd in 3QFY25 (vs. 2.86mmscmd in 2QFY25).

* Management guided a capex of INR8b for FY25. In 2QFY25, GUJGA incurred a capex of INR1.3b.

* The company added nine new CNG stations in 2QFY25.

* We cut our volume estimates marginally, by 2%, for both FY26/FY27 to 10.9mmscmd/11.6mmscmd. 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 INR660 (premised on 30x Dec’26E EPS).

Beat on EBITDA and PAT as healthy margins outweigh volume weakness

* In 2QFY25, GUJGA reported an EBITDA and PAT, which were 10% and 17% above our estimates, respectively. The overall volume was down 4% vs. our estimate, though this was offset by the EBITDA/scm margin of INR6.4 (our est.: INR5.6). The beat at the EBITDA level appeared to be largely driven by gas cost optimization, as gross margin expanded from INR8.6/scm in 1QFY25 to INR10.4/scm in 2QFY25. In 3QFY25, we expect a recovery in volumes QoQ as 2Q volumes were hit by seasonality at Morbi.

* EBITDA stood at INR5.1b (est. of INR4.7b; up 4% YoY), and standalone PAT stood at INR3.1b (est. of INR2.6b; up 3% YoY). The sharp variance at the PAT level was a function of depreciation coming in below our estimates.

* Overall volumes in 2QFY25 came in at 8.8mmscmd, missing our estimates by 4%. However, EBITDA/scm stood at INR6.4 (vs. our est. of INR5.6; up 19% QoQ).

* CNG volumes were 2.9mmscmd (+12% YoY), in line with 2QFY24.

* PNG I/C volumes decreased to 5.1mmscmd (our est. 5.4mmscmd; -16% YoY).

* PNG domestic volumes stood at 0.8mmscmd (our est. 0.6mmscmd; +9% YoY).

* The company added more than ~38.5k new domestic customers and nine new CNG stations.

* As of 30 Sep’24, the company secured a signed volume of ~527,000scmd, set to be commissioned in the coming months.

* In 1HFY25, while net sales grew 8% YoY to INR83.2b, EBITDA/PAT declined 30%/ 37% YoY to INR12.9b/INR7.3b. In 2HFY25, we estimate net sales/EBITDA/PAT to grow 1%/12%/3% 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 P/E of 26.2x FY26E and EV/EBITDA of 14.9x for FY26E. We reiterate our BUY rating on the stock with a TP of INR660, valuing it at 30x Dec’26E EPS.

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