Gujarat Gas - EBITDA margin expansion due to lower gas cost - HDFC Securities

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

Our BUY recommendation on Gujarat Gas (GGL) with a price target of INR 900 is premised on (1) volume growth at 20% 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. Q1FY22 EBITDA was 34% above our estimate and APAT was 43% above, owing to 44% above-than-expected per unit EBITDA margin, supported by lower gas cost, lower-than-expected interest cost and higher-than-expected other income, offset by 7% lower volumes.

Volumes: Blended volume stood at 10.01mmscmd (HSIE 10.77), supported by industrial demand (7.78mmscmd or 78% of volume mix). CNG volumes were at 1.55mmscmd (+127% YoY, -9% QoQ), domestic PNG volumes at 0.59mmscmd (+4% YoY, -19%QoQ) and commercial PNG volumes at 0.09mmscmd (+167% YoY, -21% QoQ). The company's gas sales volume was impacted by the second COVID-19 wave during Q1.

Margin: Per unit gross spread, at INR 10.43 (+11% YoY, +48% QoQ), benefited from lower raw material costs due to domestic contracts of 2.0mmsmcd in Q1. Per unit EBITDA came in at an all-time high of INR 7.94/scm (+61% YoY, +56% QoQ). We expect per unit EBITDA of INR 6.1/6.3/scm in FY22/23E.

Change in estimates: We raise our EPS estimates for FY22E by 5.1% and FY23E by 2% to INR 24.9/30.9, to factor in the Q1FY22 performance in FY22, and a better volume assumption for 23E.

DCF-based valuation: Our target price of INR 900 is based on Mar-23E free cash flows (WACC 9%, terminal growth rate 3%). The stock is currently trading at 25x FY23E EPS.

Shares of Gujarat Gas Limited was last trading in BSE at Rs. 737.15 as compared to the previous close of Rs. 772.25. The total number of shares traded during the day was 320322 in over 13264 trades.

The stock hit an intraday high of Rs. 785 and intraday low of 734. The net turnover during the day was Rs. 242066061.

Source : Equity Bulls

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