ADD on Gujarat Gas - Volumes surprise positively! - HDFC Securities

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

Our ADD recommendation on Gujarat Gas (GGL) with a price target of INR 404 is premised on (1) volume growth of 17% 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. 3QFY21 EBITDA/APAT was 27/40% above our estimates owing to, higher-than-expected per unit gross margin, 16% higher-than- anticipated volumes at 11.45mmscmd, lower-than-anticipated depreciation and finance cost, offset by a higher-than-expected tax outgo.

Volumes: Blended volume stood at 11.45mmscmd (HSIE 9.90), pushed by strong industrial demand (9.16mmscmd or 80% of volume mix). CNG/Domestic PNG/Commercial PNG volumes stood at 1.54/0.64/0.10mmscmd in 3Q vs 1.28/0.64/0.07mmscmd in 2Q. Volumes were at a record high in 3Q, the highest-ever in a quarter in the past five years. The company's gas sales volume has shown a robust recovery post lockdown.

Margin: Per unit gross spread expanded by INR 1.25 YoY to INR 7.8/scm. This is attributable to part retention of the benefit of falling RMC. Per unit EBITDA came to INR 5.8/scm (vs. INR 4.3/8.1 per scm in 3QFY20/2QFY21). 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 5.1/5.1/scm.

Change in estimates: We raise our FY21/22E EPS estimate by 17.1/8.0% each to INR 18.8/20.1 to factor in better-than-expected volumes and the overall performance in 9MFY21.

DCF-based valuation: Our target price of INR 404 is based on Dec-22E free cash flows (WACC 11%, terminal growth rate 3.0%). The stock is currently trading at 18.9x FY22E EPS.

Shares of Gujarat Gas Ltd was last trading in BSE at Rs.435.1 as compared to the previous close of Rs. 379.75. The total number of shares traded during the day was 1144658 in over 30761 trades.

The stock hit an intraday high of Rs. 449 and intraday low of 407.6. The net turnover during the day was Rs. 493405683.

Source : Equity Bulls

Keywords