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EBITDA spreads in line while volumes were marginally higher

Gujarat Gas' Q3FY25 results were in line, volumes marginally higher on recovery in Morbi demand and in-line EBITDA spread. Volumes at 9.5mmscmd versus our expectations of 9.3mmscmd with Morbi contributing 3.35mmscmd and CNG reached a new peak at 3.1mmscmd, while the EBITDA spread of Rs 4.37/scm met our expectations. The trending volumes are Morbi are ~2.8-3mmscmd as the sector is affected by factors - geopolitical situations globally and propane competition. The current price for ceramic cluster at Rs 47/scm vs propane at Rs43/scm. We maintain our SELL rating on the stock with a revised target price of Rs 400/share.

Result Highlights

* Performance: The reported volumes of 9.5mmscmd, higher than estimated of 9.3mmscmd. The EBITDA spread at Rs4.37/scm was in line with our expectation of Rs 4.34/scm. Compared to our estimates the EBITDA performance is in line while PAT is stronger on higher other income. EBITDA/PAT at Rs 3.8/2.2bn, down 5%/ flat YoY and down 26%/27.8% QoQ due to an increase in gas cost on reduction in APM allocation which the company was unable to fully pass on.

Stock performance

* Volumes at 9.5mmscmd were up 3.4% YoY and 8.2% QoQ. CNG volumes were 3.1wmmscmd (attaining new peak) up 12.2% YoY and 6.5% QoQ. D-PNG volumes at 0.74mmscmd were up 4.2% YoY but down 2.6% QoQ. Industrial volumes were at 5.5mmscmd (Morbi at 3.35mmscmd) down 7.9% YoY but up 15.5% QoQ.

* Price hikes: The Industrial morbi price was increased by Rs 2.3/scm to Rs 46.95/scm (exclude VAT) on 11-Dec’24 and CNG price was increased on 1-Dec’24 by Rs 1.5/kg to Rs77.76/kg.

* Spreads: The gross margin at Rs8.3/scm flat YoY and down 19.6% QoQ on higher gas cost despite price increases in CNG and industrial segment as they were lower hikes. Opex was Rs4/scm; vs Rs3.1 a year ago and Rs4 the previous quarter. Gas cost: The average blended gas cost was at Rs 39.3/scm (USD13.1/mmbtu) marginally higher than our expectations of USD12.7mmbtu. EBITDA/scm was Rs4.4, down 8.2% YoY and 31.6% QoQ, on higher gas costs.

* APM Allocation shortfall: During Q3FY25, the APM gas allocation for the CNG segment was reduced twice, impacting the company's gas sourcing strategy. The first reduction occurred on 16th Oct'24, bringing the allocation down from 63% to 51%. A further reduction to 37% was implemented on 16th Nov'24. However effective 16th Jan'25, the APM gas allocation was increased back to 51%, a positive development expected to alleviate sourcing pressures.

* Q4FY25 Outlook: On 1-Jan’25 CNG price was further hiked by Rs1.5/kg to Rs79.26/kg, the benefit would be witnessed in Q4FY25 which would also be supported by increased APM supply and possible NWG allocation in mid Feb’25 and result in better EBITDA spread outlook for Q4FY25. 9MFY25 performance: EBITDA/PAT was at Rs 14.3/8.6bn vs Rs 12.9/7.3bn last year. The volumes at 9.7mmscmd (vs 9.2 last year), of which CNG was at 3mmscmd vs 2.7 and Morbi at 3.86mmscmd flat YoY. The EBITDA spread was at Rs 5.3/scm vs 5.1 the last year.

* Connections: The company added 38,200 new domestic customers, supplying to more than 2.23mn D-PNG customers. The company operates in CNG with over 825 stations and added 5 new during this quarter.

Valuation

Given its cashflows and reasonable capex the company is rapidly de-levering and maintaining a decent RoCE. We forecast spreads of Rs/scm 5.5/5.8/6 for FY25/26/27. The stock trades at 26.2x/23.1x FY26e/27e PER. We value it on a PER basis assigning a 20x multiple and, recommend a SELL with a target price of Rs 400/share.

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