ADD on Gujarat Gas - Higher margins drive profitability - HDFC Securities

Mr. Nilesh Ghuge & Mr. Harshad Katkar, Institutional Research Analyst, HDFC Securities

Our ADD recommendation on Gujarat Gas (GGL) with a price target of INR 346 is premised on (1) volume growth of 19% CAGR over FY21-23E, (2) portfolio of mature, semi-mature and new geographical areas (GAs) and (3) compelling valuations given superior return ratios among the city gas distribution players. 2QFY21 EBITDA/APAT was 2/3x above our estimates, primarily owing to, higher-than-expected per unit gross margin, and 6% higher-than-anticipated volumes at 9.85mmscmd.

Volumes: Blended volume stood at 9.85mmscmd (HSIE 9.25), pushed by strong industrial demand (7.86mmscmd or 80% of volume mix versus 69% in 1Q). CNG/Domestic PNG/Commercial PNG volumes stood at 1.28/0.64/0.07mmscmd in 2Q vs 0.68/0.57/0.03mmscmd in 1Q. Blended volumes have recovered to ~10mmscmd in 3QFY21 as per the management.

Margin: Per unit gross spread expanded by INR 3.7 YoY to INR 10.2/scm. This is attributable to part retention of the benefit of falling RMC. APM (20% of 2Q volume mix) declined to USD 2.39/mmbtu, (-35% YoY) and Asian spot LNG price (45%) declined -20% YoY. Per unit EBITDA came to INR 8.1/scm (vs. INR 4.3/4.9 per scm in 2QFY20/1QFY21). However, we believe that these margins are not sustainable, and expect them to correct from the current levels in the future. For FY21/22E, we are factoring in a per unit EBITDA margin of INR 5.9/5.0/scm.

Change in estimates: We raise our FY21/22E EPS estimate by 53.2/4.7% each to INR 16.0/18.6 to factor in better-than-anticipated performance in 2QFY21.

DCF-based valuation: Our target price of INR 346 is based on Sept-22E free cash flows (WACC 11%, terminal growth rate 3.0%). The stock is currently trading at 17.5x FY22E EPS.

Shares of Gujarat Gas Ltd was last trading in BSE at Rs.312.25 as compared to the previous close of Rs. 301.25. The total number of shares traded during the day was 102307 in over 3566 trades.

The stock hit an intraday high of Rs. 322.75 and intraday low of 306.5. The net turnover during the day was Rs. 32060439.

Source : Equity Bulls

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