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Gujarat Gas' Q2FY25 results were disappointing, volumes negatively surprised on weaker Morbi demand offset by an improved EBITDA spread. Volumes at 8.75mmscmd versus our expectations of 9.48mmscmd with Morbi contributing 2.9mmscmd and CNG declined from its peak at 2.93mmscmd, while the EBITDA spread of Rs 6.4/scm was higher than anticipated. The trending volumes are morbi are up ~3.5mmscmd but the sector is affected by factors - geopolitical situations globally; propane competition, shipping related issues. The current price for ceramic cluster at Rs 44.68/scm vs propane at Rs43.6/scm. This gives a weak picture for Q2 and the company expects a recovery in H2FY25 where Morbi cluster demand and EBITDA spreads would be a key. We downgrade the stock to a SELL rating with a revised target price of Rs 462/share.

Result Highlights

* Performance: The company reported volumes of 8.75mmscmd, lower than estimated of 9.48mmscmd. The EBITDA spread at Rs6.4/scm was better than our expectation of Rs 6.1/scm. Compared to our and consensus, the performance is weaker with volumes a negative surprise. EBITDA/PAT at Rs 5.1/3.1bn, up 3.5%/ 3.1% YoY and down 4%/6.9% QoQ with weaker volumes but better EBITDA spreads for both YoY and QoQ basis.

* Volumes at 8.75mmscmd were down 6.1% YoY and 20.3% QoQ. CNG volumes were 2.93mmscmd (declines from its peak) up 11.8% YoY but down 1.7% QoQ. DPNG volumes at 0.76mmscmd were up 8.6% YoY and 22.6% QoQ. Industrial volumes were at 4.91mmscmd (Morbi assumed at ~2.9mmscmd) down 16.2% YoY and 32.3% QoQ. New industrial customers: It had added 0.2mmscmd of industrial volumes from new customers during the last quarter and 0.088mmscmd in the current quarter. The company has a signed volume of ~0.527mmscmd which will be commissioned in coming days, totaling ~0.83mmscmd.

* Price hikes: The Industrial morbi price was increased by Rs 2.5/scm to Rs 44.68/scm on 4-Jul’24 and CNG price on 1-Aug’24 by Rs 2/kg to Rs76.26/kg.

* Spreads: The gross margin at Rs10.4/scm up 12.3% YoY and 20.2% QoQ on better realizations on price increases in CNG and industrial segment, more than offsetting gas cost increase. Opex was Rs3.4/scm; vs Rs2.9 a year ago and Rs2.8 the previous quarter. Gas cost: The average blended gas cost was at Rs 36.6/scm ($12.1/mmbtu) marginally lower than our expectations of $12.2mmbtu. EBITDA/scm was Rs6.4, up 10.3% YoY and 19.1% QoQ, on price hikes and better gross realizations.

* Connections: The company added 38,500 new domestic customers, supplying to more than 2.19mn D-PNG customers. The company operates in CNG with over 819 stations and added 9 new during this quarter.

* H1FY25 performance: EBITDA/PAT was at Rs 10.5/6.4bn vs Rs 8.8/5.1bn last year. The volumes at 9.86mmscmd (vs 9.27 last year), of which CNG was at 2.96mmscmd vs 2.62 and Morbi at 4.06mmscmd vs 3.98. The EBITDA spread was at Rs 5.8/scm vs 5.2 the last year.

Valuation

Given its cashflows and reasonable capex the company is rapidly de-levering and maintaining a decent RoCE. We forecast spreads of Rs/scm 5.8/5.9/6.1 for FY25/26/27. The stock trades at 28.3x/24.8x FY26e/27e PER. We value it on a PER basis assigning a 22x multiple and, recommend a SELL with a target price of Rs 462/share.

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