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EBITDA miss amid lower volumes, weaker tariff

* Gujarat State Petronet (GUJS)’s 2QFY25 EBITDA was 18% below our estimate at INR1.9b, as total volumes came in 13% lower than our estimate. This marks a slowdown compared to the strong 1Q trend. Implied tariff also came in ~13% below our estimate at INR831/mmscm. PAT was boosted by strong other income (dividend from Gujarat Gas and Sabarmati Gas).

* Given lower gas demand from the power sector, we have trimmed our volume assumptions and consequently reduced our FY26/27E PAT by 6%/2%.

* Following Gujarat Gas’s announcement of the scheme of amalgamation and arrangement in Sep’24, under which GSPC, GUJS, and GEL shall amalgamate with GUJGA, the swap ratio for GUJS was fixed at 10:13 (i.e., 10 shares of GUJGA (at an FV of INR2) shall be issued for every 13 equity shares of GUJS (at an FV of INR10)).

* Based on this swap ratio, we derive our TP of GUJS at INR415/share. We reiterate our Neutral rating on the stock.

Lower-than-expected volumes and tariffs lead to EBITDA miss

* GUJS’ 2QFY25 EBITDA was 18% below our estimate at INR1.9b (-53% YoY), as

* The total volumes came in 13% below our estimate and had a marked slowdown compared to the strong 1Q trend,

* Tariff came in ~13% below our estimate, at INR831/mmscm.

* EBITDA was also impacted by a sharp rise in other expenses (+56% QoQ).

* Total volumes were 13% below our est. at 29.7mmscmd (-2% YoY):

* CGD volumes increased to 12.6mmscmd (+21% YoY)

* Fertilizer volumes were at 4.5mmscmd (+30% YoY)

* Power/ref-petchem volumes at 6.4/7.5mmscmd (+58%/+14% YoY)

* Other volumes stood at 5.4mmscmd (+11% YoY)

* PAT came in 103% above our est. at INR3.9b (-27% YoY), as other income stood at INR2.9b (our est. INR758m, +10% YoY).

* GUJS's Board approved an additional equity infusion of INR420m in GSPL India Gasnet Ltd. (GIGL), taking the cumulative equity infusion approval to INR13.3b. GUJS shall continue to hold 52% shareholding in GIGL.

Valuation and view

* The available LNG capacity in Gujarat is expected to grow 55% to 42.5mmtpa over the next two years. Most of this volume is likely to flow through GUJS’s network. We believe the company could post a 7% CAGR in transmission volumes over FY24-27.

* We expect volumes to jump to ~37mmscmd in FY27, as it is a beneficiary of: a) the upcoming LNG terminals in Gujarat, and b) an improved demand owing to the focus on reducing industrial pollution (Gujarat has five geographical areas identified as severely/critically polluted).

* Based on the announced share swap ratio of 10:13 (GUJS:GUJGA), we arrive at our TP of INR415. We reiterate our Neutral rating on the stock.

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