IGI Logo

We downgrade Gujarat Gas Limited (GGL) to SELL from Reduce, with an unchanged Dec-24E DCF-based TP of Rs440 primarily due to uncertain Morbi volume outlook and volatile margin profile amid expensive valuations (trading at ~27x Dec-25E EPS vs. peers at ~15x). GGL reported a 20% miss in Q3FY24 EBITDA of Rs4bn due to 6% lower-than-expected volumes at 9.2mmscmd (down 2% QoQ). Morbi volumes fell 7% QoQ to 3.7mmscmd. EBITDA/scm fell 18% QoQ to Rs4.8 (15% miss). Mgmt. indicated current Morbi volumes are at ~3.7mmscmd and Red Sea crisis has impacted ceramic exports. EBITDA/scm guidance is unchanged at Rs4.5-5.5, while FY25 volume growth is targeted at ~10%, driven by 15% CNG growth, with capex of Rs10bn (lower due to the new full DODO scheme). Our FY24-26E earnings are slightly cut by 1-3% each.

Result Highlights

PAT fell 26% QoQ and 41% YoY to Rs2.2bn (27% miss) in Q3FY24. IPNG volumes fell 6% QoQ to 5.5mmscmd (up 37% YoY on a low base). Non-Morbi volumes were rangebound. CNG volume was up 14% YoY/6% QoQ at 2.78mmscmd, while domestic PNG was up 6% YoY/1% QoQ to 0.71mmscmd. Gross margin fell 9% QoQ to Rs8.4/scm. Employee costs fell 1% YoY/5% QoQ to Rs481mn, while other expenditure grew 14% YoY/5% QoQ to Rs2.57bn. Opex/scm rose 5% QoQ to Rs3.6 vs. Rs3.4 estimated by us (down 11% YoY). Other income fell 28% YoY to Rs230mn (down 23% QoQ). GGL added 38,000 DPNG connections, 197 commercial customers, and 69 industrial customers (volume of 116mscmd) in Q3. 11 CNG stations were added in Q3, taking the total CNG station base to 817 stations as of Dec’23-end.

Management takeaways

Current Morbi volumes are at ~3.7mmscmd vs. the overall potential of 8-8.5mmscmd. There was a slowdown in non-Morbi volumes in Q3FY24 due to alternate fuel economics. GGL expects 1-1.2mmscmd of incremental CNG volumes in two years. Capex target for FY25E is ~Rs10bn; while that for 9MFY24 was >Rs6bn. Management has revised its capex downwards due to the shift to the full DODO model (>200 CNG stations in two years) for CNG network expansion. Rural Ahmedabad has a total demand potential of 0.5mmscmd across segments, while 1-1.5mmscmd demand could come from industrial clusters of Surat, Bharuch, and Ankleshwar. GGL has recently contracted 0.5mmscmd of domestic gas for four years to meet priority needs. Out of 4.5mmscmd term contracts, 3.3mmscmd would expire by mid-CY25. GGL received PNGRB approval for 8% green hydrogen blending in the pilot at NTPC Hazira. Spot LNG exposure is sub-2mmscmd.

Valuation

We value GGL using the DCF method. Our TP implies a 20.4x Dec-25E target P/E. We roll over to Dec-25E and cut FY24-26E EPS by 1-3% each on slightly lower volumes. Key risks: Adverse oil-gas prices, currency, regulations, competition, and operational issues.

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354