Analyst Corner | Margin recovery in sight, retain ‘buy’ on Gujarat Gas

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Published: March 9, 2019 2:53:50 AM

Gujarat Gas currently derives 2.5 mmsmcd of volumes from Morbi but has a connected capacity of 3 mmsmcd which is not using natural gas.

With margin recovery also in sight and valuations at 15x FY20E P/E, we keep our ‘BUY’.

NGT has ordered all ceramic units at Morbi to either shift to natural gas or shut down. While Morbi volumes (2.5 million standard cubic feet per day; 40% of GGAS vol) have been witnessing softer trends of late, any gain in market share triggered by curb on polluting substitute fuels can have a major positive impact since 3 mmscmd of units are connected with Gujarat Gas Morbi units use other fuels (coal gasifier). With margin recovery also in sight and valuations at 15x FY20E P/E, we keep our ‘BUY’.

The National Green Tribunal (NGT) has ordered the shutdown of all ceramic units running on coal gasifier (mainly unorganised sector) unless they shift to natural gas. This order comes after a petition filed by a resident against industrial pollution.

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Guj Gas currently derives 2.5 mmsmcd of volumes from Morbi but has a connected capacity of 3 mmsmcd which is not using natural gas. Thus volumes could potentially double from current levels but only if implemented successfully without riders.

The president of the Morbi Ceramic Association has said they would challenge the order in the apex court since it would adversely affect the economics of the industry which is already facing tough competition from China. A ban on the usage of coal gasifiers by the Central Pollution Control Board in 2014 had led to a jump in natural gas volumes from 1 mmscmd to 3.8-4 mmcmd. But, this was followed by appeals and court cases which ultimately permitted the usage of modified coal gasifiers meeting the pollution norms. This prompted the ceramic customers to shift back to coal gas; natural gas volumes fell to 1.5-1.6 mmscmd.

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Thus execution and sustainability of the order could remain an issue. With the order likely to be challenged at a higher court too, it is possible that there could be a partial overturn of the ban. Volume trends at Morbi have been soft recently (2.2 mmscmd in Q4FY19E vs 2.4 mmscmd in Q3FY19 and 2.6 mmsmcd in Q2FY19). But any ban on substitute fuels could result in a significant uptick next year. Even otherwise, the long term growth story looks promising. Of 130 new ceramic plants due to start, 75 started operations last year while 55 are yet to be operational. With each plant potentially consuming 7-10k scmd, 55 new plants can add 0.5 mmscmd of demand (20% upside to existing volumes).

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