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Gujarat Gas (GGL) posted a margin-driven earnings beat in Q2FY24, while volume was flattish QoQ at 9.3mmscmd (a 4% miss) on range-bound Morbi volume. EBITDA/scm rose 25% QoQ to Rs5.8 — a 30% beat on 3% higher realizations. EBITDA/PAT was 25/38% above our estimate at Rs5/3bn. Mgmt. indicated that current Morbi volume stands at ~4mmscmd, and should remain range-bound for coming few months, though eventual outlook depends on gas vs propane economics. Mgmt. maintains EBITDA/scm at Rs4.5-5.5, while LT volume CAGR target is ~10% with Rs10-12bnpa capex in FY24/25. We cut FY24E/25E EPS by 12%/11%, to factor-in the ~4% volume/~6% unit margin cut for both years, based on current run-rate/scenario. We retain HOLD on GGL and roll over to Sep-25E, thus revising down our TP by 8% to Rs440/sh.

Gujarat Gas: Financial Snapshot (Standalone)

Result Highlights

Morbi volumes declined slightly, by 2% QoQ to 3.9mmscmd in Q2. CNG was up 13% YoY/flat QoQ at 2.6mmscmd. Domestic PNG was up 1% YoY/17% QoQ to 0.7mmscmd, while commercial PNG was up 8% QoQ. Margins were driven by cheaper spot LNG availability. Employee costs rose 1% YoY/fell 2% QoQ and Other Expenditure grew 14% YoY/fell 1% QoQ, to Rs2.45bn. Opex/scm fell 3% QoQ to Rs3.4 (down 9% YoY), but was higher than our estimate. Depreciation rose 2% QoQ and interest costs were up 6%, at Rs78mn. Other income rose 61% YoY to Rs298mn (up 25% QoQ). GGL added 53,000 DPNG connections, 221 commercial customers and 61 industrial customers (volume of 83mscmd) in Q2, while signed-volume of 0.542mmscmd is yet to be commissioned. The CNG station-base was largely flat HoH, at 806 stations as of end Sep-23 end.

Management takeaways

The management refrained from giving absolute volume guidance for FY24/25, but expects Morbi volumes to remain range-bound for the next few months. Total volume growth may log at ~10% YoY in FY25 & thereafter, with CNG growing faster than average. GGL targets non-Morbi industrial volumes of 2.5-3mmscmd in 3 years. Its MWP for non-Gujarat GAs is already ahead, in terms of CNG. Of the total volume, non-Gujarat volume constitutes ~0.5mmscmd via CNG & industrial. After the recent IPNG price hike, current ceramic/non-ceramic realizations stand at Rs45-45.5/48-48.5 per scm. More price hikes in IPNG are a possibility. IPNG is Rs2-3/scm more expensive than propane currently, on a landed basis. Morbi volume would be higher if spot prices further reduce, otherwise it is likely to stay range-bound at ~4mmscmd for the next few months.

Valuation

We value GGL based on DCF methodology. Our TP implies 20.3x Sep-25E target P/E. Key risks: Adverse oil-gas prices, currency, regulations, competition, and operational issues.

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