Gujarat Gas rating – Buy: Sharp price hike to aid profitability

By: |
August 30, 2021 6:45 AM

Double-digit volume growth likely to be sustained; ‘Buy’ retained with TP of Rs 942

GGL will need to hike CNG prices byGGL will need to hike CNG prices by <15% to fully pass on the Oct price rise. Retain Buy.

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.

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Global markets: Asian stock markets jittery as China woes sap confidence
2Airtel, Voda-Idea, RIL, Dish TV, Yes Bank, BPCL, SBI Cards, Jubilant Foodworks, Adani stocks in focus
3Market LIVE: SGX Nifty hints at cautious start for Sensex, Nifty; Sansera Engineering shares listing today