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Quick Pointers:

* Morbi volumes at 2.1mmscmd, down from 2.5mmscmd in Q1FY26.

* Gas remains Rs4-6/scm expensive compared with propane.

Gujarat Gas (GUJGA) total volumes were in line with our estimates, flat YoY and 2.4% lower QoQ, at 8.7mmscmd in Q2FY26 (Ple: 8.5mmscmd). Increase in gas costs  and other expenses led to a decline in EBITDA/scm to Rs5.6 in Q2FY26 vs Rs6.4/scm in Q2FY25 and Q1FY26 each, missing our estimate of Rs6.0/scm. EBITDA stood at Rs4.5bn (-13.0% YoY, -14.0% QoQ, Ple Rs4.7bn, BBGe Rs4.9bn), while PAT was Rs2.8bn (Ple Rs2.6bn, BBGe Rs2.9bn, -8.4% YoY, -14.0% QoQ). Management expects Morbi volumes to be lower in FY26 as customers shift to propane due to price differentials. Due to this, we have built in volumes of 8.9mmscmd for FY26E, in line with mgmt. guidance of sub 9mmscmd. For FY27E/FY28E, we build in volumes of 9.6/10.2mmscmd, driven by an expected improvement in non-Morbi volumes. The company expects EBITDA/scm at Rs5.5/scm in FY26; we have therefore lowered our FY26E assumption from Rs5.8/scm in line with the guidance. As a result, we maintain the rating at ‘Hold’ with a TP of Rs415 (earlier Rs442) based on 24x FY27/FY28E EPS. 

* Total volume decline YoY/QoQ: Total sales volume stood at 8.7mmscmd (-1.0% YoY, -2.4% QoQ, PLe 8.5mmscmd). Overall decline was led by PNG-industrial/commercial, which declined by -10.9% YoY and 7.0% QoQ. This was partly offset by robust growth of 9.2% YoY and 2.3% QoQ in PNG-domestic segment, while CNG segment grew by impressive 13.3% YoY, while it remained flat QoQ. PNG-household/CNG segment have has been growing steadily, concerns remain on industrial/commercial segment due to demand of end user industry as well as cost economics vis-a-vis alternate fuel. We build-in volume of 10.2mmscmd in FY28E compared with 9.6mmscmd in FY25.

* Margin declines: Sequentially gross realization declined slightly (-1.0%) from Rs48.0/scm to Rs47.4/scm, while gas costs increased slightly (+0.6%) from Rs37.2/scm to Rs37.4/scm. This led to a 6.9% QoQ decline in gross margin to Rs10.0/scm vs Rs10.4/scm in Q1FY26. Although, gross realization improved 1.0% YoY, gas costs increased 2.3% YoY, leading to a -3.4% YoY impact on gross margin. Opex/scm increased 2.0%/10.5% QoQ/YoY. As a result, EBITDA/scm declined from Rs6.4/scm in Q1FY26 and Q2FY25 each to Rs5.6/scm in the quarter.

* Concall Highlights: 1) Amalgamation scheme has been approved by shareholders and is waiting for MCA approval, expected by December 2025. Relisting of new entity will take further 2-3 months. 2) PNG Domestic segment - Customer base - >28Lakh, added 0.27 lakh and registered 0.34 lakh customers in Q2FY26 despite monsoon season, added ~42,400 new domestic PNG connections. 3) Morbi Volumes – 2.13mmscmd in Q2FY26, vs 2.51mmscd in Q1FY26 due to Janmashtami festival. Co. expects volumes to be lower this year at 2mmscmd. Current runrate/baseline volumes at 1.7-1.8mmscmd, with no further decline expected. Over 200 customers rely solely on natural gas (~1.5–1.6 mmscmd), as high-quality manufacturers prefer gas over propane for its superior heat quality. 4) Propane to gas differential of Rs4-6/scm – propane being at discount against gas for Q2FY26. Prices of propane (12% of brent) vs LNG (17-18% of Brent) 5) Non-Morbi Volumes – 2.22mmscmd in Q2FY26 vs 2.20mmscnd QoQ and 2.05mmscmd YoY. Expect non-Morbi volumes to improve driven by growth in Ahmedabad rural, D&H and Thane. Expect good industrial volume increase in these GA’s. Co aims to add ~0.5mmscmd across both Non-Morbi and new GA in next year. Demand of 2-3 lakh scmd in next 18 months. 6) CNG segment - up 13% YoY, with 11% growth in Gujarat and 26% YoY outside Gujarat. Base customer vehicles – 16.22L vs 14.12L YOY. Commercialized 4 new CNG stations this qtr. 7) Volume allocations (mmscmd) QoQ growth - APM – 2.03 vs 2.06, NWG - 0.44 vs 0.54, Long term – 3.44 vs 3.39, short term - 2.85 (includes spot from IGX) vs 3.04. 8) Expect Capex of Rs800cr in FY26, H1FY26 capex at Rs282cr, for investments on gas infrastructure. 9) Capex in FY27 – similar lines of FY26 only for PNG, CNG. After merger there will be certain addition of capex. 10) Guidance for EBITDA/scm in FY26 - Rs4.5-5.5/scm. 10) In Q2FY26, company received 100% allocation for domestic sector. But had 64% CNG shortfall, leading to total shortfall of 51% in priority segment. 11) Secured 1mmtpa LNG deal with Qatar Energy (2026–2043) and 0.4mmtpa Henry Hub–linked supply from 2026–27, enhancing pricing competitiveness and margins?

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