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Gujarat Gas (GGL) reported a slight 2% miss on Q1FY25 EBITDA at Rs5.4bn, due to 3% lower unit gross margin, partly offset by 1% higher volumes at 11.0mmscmd (up 13% QoQ). Morbi volume rose 36% QoQ to 5.2mmscmd on favorable economics vs. propane. EBITDA/scm fell 20% QoQ to Rs5.4 (up 16% YoY, a 3% miss). The mgmt indicated current Morbi volumes to be down 30- 40% due to the weak ceramic outlook, seasonality, and cheaper propane. FY25 volume growth guidance is muted at 5-7% vs 10% typically targeted. EBITDA/scm guidance target of Rs4.5-5.5 is retained. GGL highlighted focus on CNG growth. We maintain our negative stance on GGL, on propane competition, volatile margins, conservative guidance, and expensive valuations (~24x Sep26E EPS vs. peers at 10-15x); retain SELL; prod up Sep-25E TP to Rs500/sh.

Result Highlights

PAT stood at Rs3.3bn in Q1FY25, at a 1% beat on higher Other Income. Total volumes grew 19% YoY and 13% QoQ to 11.0mmscmd. IPNG volumes jumped up 25% QoQ to 7.3mmscmd (up 23% YoY). Non-Morbi volumes were up 3% QoQ to 2.0mmscmd, largely range-bound. CNG volume was up 14% YoY/3% QoQ at 2.98mmscmd, with domestic PNG up 3% YoY/down 27% QoQ to 0.62mmscmd. Gross margin fell 20% QoQ to Rs8.6/scm (up 5% QoQ). Employee costs fell 6% YoY (up 2% QoQ) to Rs489mn, while other expenditure grew 12% YoY/fell 11% QoQ to Rs2.77bn. Opex/scm also fell, by 8% YoY/20% QoQ to Rs3.3 (vs. our estimate of Rs3.4). GGL added 37,400 DPNG connections, while adding new industrial customers (volume of 200mscmd) in Q1. The CNG station-base stood at 811 as of end Jun-24, with 3 additions in Q1. Capex during the quarter stood at Rs2.06bn, while FY25 guidance is Rs10bn.

Management takeaways

Current IPNG price is Rs44/scm in Morbi vs Rs40/scm for propane. Generally, the Rs1- 2/scm difference is the hurdle rate, after which IPNG demand shifts to propane. By Q2- end, the volume situation should improve. Total vol. potential in Morbi is 8mmscmd for IPNG, while 2.5-3.0mmscmd is possibly sticky volumes, albeit uncertain. The Mar-24 new IPNG scheme saw >150 responses to the EoI, and GGL is in the process of signing agreements. Future PNG potential is in the Ahmedabad Rural, Thane, Silvassa, and Kutch West GAs, and mgmt expects to see 7-8% YoY volume growth. CNG volume saw good growth, at 14% YoY in Q1FY25, with Gujarat/outside Gujarat up 12%/27% and share being 87%/13% in volume mix. GGL plans adding 22 stations in FY25, while 62 would be upgrades. The FDODO scheme would add to this, and hence overall additions would stand at ~100. The last 3-4-year capex was 40-45% toward new areas. Capex target for coming 3-5 years is Rs12-15bnpa, with target RoE of 15%.

Valuation

We value GGL using the DCF method. Our TP implies a 19.2x Sep-26E target P/E. We roll over to Sep-26E and tweak our FY25-26E EPS by 1% each. Key risks: Adverse oilgas prices, currency, regulations, competition, and operational issues.

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