With gas not being included under GST, it has become more uneconomical. Dirtier alternatives like coal and fuel oil have been included under GST. As a result, industrial offtake for Gujarat Gas has been suffering. Our discussions with the consumers suggest that the sales volume at Morbi has declined from 2.65mmscmd a few weeks ago to 2.2mmscmd. In our Initiating Coverage report, we had mentioned that LPG accounted for 4% market share at Morbi.
We understand that suppliers are building infrastructure at Rajkot, which would facilitate further inroads for LPG. Additionally, of the 0.45mmscmd volume lost, 0.1mmscmd has been replaced by propane, which is Rs 6/kg cheaper than gas at Rs 24.5/kg. We believe few more companies are contemplating propane usage. With coal at Rs 8/kg, it remains ~20% cheaper than gas. Gas has a market share of ~35% at Morbi and coal gasifiers have a market share of ~60%; the rest 5% is currently with LPG and Fuel Oil. Although ~100 ceramic units are getting added this year, we believe that coal would remain a challenge amid cheaper alternatives.
As we had mentioned in our Initiating Coverage report, Long Road Ahead dated April 19, 2017, we acknowledge the long-term demand potential. Bhavnagar and Jamnagar are ramping up, and newer cities like Amreli, Ahmedabad rural, Dahej, Dahod, Panchmahal and Anand would add volume growth in the longer run. However, as long as industrial exposure remains high at 68%, both volumes and margins would remain highly volatile. If there is stricter enforcement of pollution norms, volumes and margins might stabilise.
The stock trades at 16.2x FY19E EPS. We assume sales volume of 5.4/6.5/7.3mmscmd and EBITDA/scm of Rs 3.8/4.6/5 in FY17/18/19. We see threat of downgrade to our numbers, if gas continues to be out of GST. We value Gujarat Gas at 15x FY19E EPS of Rs 46.5. With a target of Rs 697, we reiterate our ‘sell’ rating.