GUJGA has a long-term contract with Shell which will expire gradually by 2024. Volumes under the contract have already reduced from 2.5mmscmd to 2.2mmscmd and are expected to decline to 2mmscmd from 2020. Due to the supply glut globally, LNG prices have declined from $6.0/mmBtu in 2019 to below $3/mmBtu this year. Replacement by low-cost LNG would improve profitability. The company is also ramping up its capacity at Morbi to enable it to handle ~8mmscmd.
NGT order may provide further volume boost: In Nov’19, the National Green Tribunal (NGT) had stipulated strict action against pollution control boards that do not comply with its Jul’19 order. It has already levied Rs 4 bn of fine on the Morbi cluster in 2019. We believe that further volume boost like Morbi could come from across the country. Gujarat is home to critically/severely polluted industrial clusters such as Rajkot, Ankleshwar, Batala, Bhavnagar, Tarapur and Vapi. Any development on this front could boost volumes significantly. GUJGA stated that customers with volumes of 2-2.5mmscmd had shifted to dirtier fuels. However, strict environmental compliance may result in a large number of these consumers returning to gas.
CNG – attractive prospects: GUJGA is expected to come up with ~100 CNG stations in three years. This would increase the reach of CNG in the state and encourage conversion. With the increasing number of CNG stations and the focus on vehicular pollution, penetration in CNG segment is expected to increase. Gujarat has ~78,000 buses, 90,000 taxis and 8.5 lakh autos. However, GUJGA sells only 1.5mmscmd of CNG compared to IGL’s 4.9mmscmd. With improving ecosystem, CNG holds a bright future for GUJGA.
Valuation and view: The NGT order has panned out strongly at Morbi. Gujarat is facilitated by better availability of gas/pipeline infrastructure. Given lower LNG prices, we have modeled Ebitda/scm for GUJGA at Rs 4.5/4.5, with volumes growth forecast of 10% for FY21/22. It trades at 21.2x FY21e EPS of Rs 13.5 and 11.8x FY21e EV/Ebitda. We value the company at 22x FY22e EPS to arrive at a TP of Rs 340 and reiterate Buy. Jump in LNG prices and open access remain the biggest risks to our rating.