Double-digit volume growth likely to be sustained; ‘Buy’ retained with TP of Rs 942
Gujarat Gas (GGL) has taken a sharp 15% hike (by Rs 5/scm) for its industrial gas in Morbi region, according to press reports. While we believe this will be viewed positively by the market, it is essentially to pass on a near q-o-q doubling in spot LNG input cost (to ~$16/mmbtu). (i) To mitigate the high spot LNG prices, GGL has shifted 20% of its input to low cost domestic gas from Reliance, Vedanta ($3.7-8.5/mmbtu) and 10% through half priced contact LNG; (ii) it has also raised CNG prices by about 4% partially to mitigate an impending 50-70% hike in domestic prices from Oct 1. GGL will need to hike CNG prices by <15% to fully pass on the Oct price rise. Retain Buy.
Strong price hike led Morbi’s high-margin growth: While GGL is making strenuous efforts to reduce its cost by changing gas mix to domestic gas and contract LNG from spot LNG, the hike for industrial gas by Rs 5/scm (15%) will keep not only margin and input gas cost in check, but will also aid profitability. GGL has given strong guidance for Morbi-led volumes coming their way in the next one–two years. Exports from Morbi make up ~35% of industry (20–25% pre-covid times). Given exports growth continues to be high, the exports mix is likely to touch ~40-50% , which fetch a premium of 10–15% over domestic prices and drive up profitability.
Outlook: Compounding growth– We believe GGL will sustain strong double-digit volume growth, particularly driven by new geographies as well as strong growth in high margin industrial/CNG business. It enjoys very high sustainable profitability with RoE in excess of 25%, and in fact continues to aggressively invest to capture high-return opportunities. We retain ‘BUY/SO’ with DCF-based TP of Rs 942 at 27x FY23e PER led by strong Morbi-driven export volumes.