Analyst Corner – Gujarat Gas: Maintain ‘buy’; margin outlook comfortable

Medium-term volume outlook thus remains intact while lower spot exposure (due to dip in volumes) alleviates concern on near-term margins. Maintain Buy.

NGT-driven policy tailwind catalyst remains a key trigger here which is yet to play out creating upside optionality.
NGT-driven policy tailwind catalyst remains a key trigger here which is yet to play out creating upside optionality.

Key takeaway: Our recent Morbi channel checks suggest volumes at ~ 6.5-7/5.7 mmscmd in Nov/Dec (Mar-21: 7.7-7.8). Volumes have been range-bound in order to mitigate the exposure to high Spot LNG prices but underlying demand seems to be robust at ~ 8-8.5 mmscmd while 75% of expected new plants have already come online.

Medium-term volume outlook thus remains intact while lower spot exposure (due to dip in volumes) alleviates concern on near-term margins. Maintain Buy.

Morbi volumes range-bound as per agreement between GUJGA and the ceramic customers in Morbi: GUJGA had taken a sharp price hike on Feb 1, taking cumulative price hike since Aug to 70%. With Spot LNG remaining elevated at > US$ 35/mmbtu, Morbi volumes have been kept range-bound at ~ 6.5-7 mmscmd in Nov (~ 85% of Mar-21 levels of ~ 7.7-7.8 mmscmd).

Our channel checks for Morbi indicate further slowdown in Dec to ~ 5.7 mmscmd: Our conversation with Morbi Ceramic Association president indicates current gas consumption at ~ 75% of pre-second wave peaks and has been accommodated by lower production and a partial shift to propane.

But underlying demand remains strong according to ceramic customers as well as GUJGA mgmt: Our recent conversation with GUJGA mgmt indicates that underlying demand could be strong at ~ 8 mmscmd while Morbi Ceramic Association President expects demand to be ideally ~ 8.5 mmscmd currently absent any constraints.

Indeed, ~ 75% of the 50-60 plants which were expected to come online have already been commissioned. Amid rising input costs, ceramic producers in Morbi have hiked prices by a cumulative 25-30% in three tranches. However, this has not resulted in any decline in interest for Indian tiles given costs have risen globally as well for most exporters. The last hike though did receive some pushback from importers based on our channel checks.

Industrial volumes outside Morbi ~ 25% higher than pre-COVID: Industrial volumes outside Morbi has been growing ahead of expectations at ~ 2.4-2.5 mmscmd (Pre- COVID ~ 2 mmscmd). NGT-driven policy tailwind catalyst remains a key trigger here which is yet to play out creating upside optionality.

Non-Morbi industrial and CNG volume growth could outpace growth from Morbi: Mgmt expects growth from industrial areas outside Morbi to outpace Morbi and this is also visible in recent trends. While contribution to overall volumes (~ 25% of industrial) is lower than Morbi, a volume growth fo > 10% is targeted in this segment with risks skewed to the upside amid upside optionalities. CNG volumes were at ~2 mmsmcd in 2QFY22 (~ 35% higher than pre-COVID) and mgmt remains confident about maintaining double-digit volume growth in this segment too.

Strong pricing power has resulted in improved margin outlook: Despite the current spike in Spot LNG costs, the sharp price hikes taken by GUJGA along with some moderation in volumes (implying lower Spot exposure) keeps us comfortable on margin outlook. Inadequate APM gas allocation could lead to moderation in CNG/ residential segments. But overall EBITDA could still remain healthy given the lower 20% contribution to volumes from these segments.

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