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Lower-than-expected margin drives miss

* GUJGA’s EBITDA came in below our estimate at INR4b in 3QFY24 as both margin and volumes were weak. EBITDA/scm stood at INR4.8 and total volumes came in at 9.2mmscmd.

* The management highlighted that they are expecting an increase in demand from rural areas specially in the outskirts of Ahmedabad and Thane areas. GUJGA has been able to capture significant CNG volumes from rural areas and that there is a significant demand for CNG in newer GAs.

* The management highlighted that the CNG business has seen more than 300% growth in the last five years, with four major OEMs supplying or marketing more than 24 models in the market. GUJGA expects CNG penetration to grow from 11% in CY23 to 18% in CY27, with better availability of supplies, new CNG model launches, the strengthening of CNG infrastructure, and a reduction in CNG prices.

* We increase our EBITDA/PAT estimates by 15%18% for FY25 and 15%/17% for FY26 as we increase our margin assumption to INR6.5/INR6.6 per scm for FY25/FY26.

* GUJGA’s long-term volume growth prospects remain robust, with the addition of new industrial units and the expansion of existing units. Hence, we reiterate our BUY rating on the stock with a TP of INR675 (at 28x Dec’25E EPS).

Miss on EBITDA as both margin and volume weak

* Total volumes stood at 9.2mmscmd (vs. our estimate of 9.5 mmscmd).

* CNG volumes grew 14% YoY to 2.8mmscmd. This growth can be attributed to investments in CNG station infrastructure, aided by favorable govt. policies.

* PNG I/C volumes rose 35% YoY to 5.7mmscmd (vs. our est. of 6.1mmscmd). GUJGA added 197 commercials and 69 new industrial customers during the quarter. It added volume of 116,000scmd as a result of the commissioning of new industrial customers. Additionally, GUJGA has signed volume of 823,000scmd, scheduled to be commissioned in the coming days.

* PNG domestic volumes grew 6% YoY to 0.7mmscmd (our est. of 0.8mmscmd). The company added ~38k new domestic customers during the quarter.

* EBITDA/scm came in at INR4.8 (est. of INR5.8/scm). Gross margin stood at INR8.4/scm (down from INR12.8 in 3QFY23). Thus, EBITDA stood at INR4b (est. of INR5.1b, down 31% YoY).

* PAT declined 41% YoY to INR2.2b (est. of INR3b).

* In 3Q, GUJGA contracted ~0.5mmscmd of domestic gas under auction from one of the upstream suppliers for four years. It also plans to add more than 200 CNG stations in the next two to three years.

* For 9MFY24, revenue stood at INR115.5b (down 10% YoY); EBITDA stood at INR12.9b (down 30% YoY) and PAT at INR7.3b (down 37% YoY). EBITDA/scm stood at INR5.1 (down 39% YoY) with total volumes at 9.2mmscmd (up 12% YoY).

Valuation and view

* The company’s long-term volume growth prospects remain robust, with the addition of new industrial units and the 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 26.6x FY25E and EV/EBITDA of 16x for FY25E. We reiterate our BUY rating on the stock with a TP of INR675, valuing it at 28x Dec’25E EPS.

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