Q4FY18 appears robust, as margin has recovered following 10% price hike post Gujarat elections, while volumes have inched up to 6.5mmscmd.
Gujarat Gas (GGL) reported operationally strong Q3FY18 with EBITDA of Rs 200 crore, up 17% y-o-y, down 1% q-o-q; 4% ahead. Volumes recovered to 6.3mmscmd, up 18% y-o-y, 10% q-o-q, 4% ahead due to volume recovery in existing markets, while EBITDA margin came in-line at R3.5/scm. Q4FY18 appears robust, as margin has recovered following 10% price hike post Gujarat elections, while volumes have inched up to 6.5mmscmd. We expect cyclical near-term volume revival as PNG remains economic versus other alternatives, while commissioning of new geographies (GAs) will meaningfully contribute from FY20. We, therefore, estimate 15% volume CAGR over FY17-22, driving 36% EPS CAGR. We have revised down DCF-based TP to R1,068 (R1,123 earlier), factoring in higher discount rate. However, we maintain ‘buy’ on long-term sanguine prospects. Industrial PNG volumes stood at 4.4mmscmd (up 22% y-o-y, 11% q-o-q); CNG at 1.3mmscmd (up 11% y-o-y, 3% q-o-q) and residential PNG at 0.5mmscmd (up 9% y-o-y, 14% q-o-q).
EBITDA margin squeezed to Rs 3.5/scm, 10% lower q-o-q, due to spurt in LNG price which was not passed on due to state elections. PAT of R60 crore was up 43% y-o-y. Robust volume prospects driven by: Economics – PNG is 20% cheaper than FO, 15% premium to coal gas; tightening environmental norms on petcoke; strong Morbi prospects amidst clampdown of ceramic & chemical capacities in China; and under-penetration: ~3mmscmd volume potential from FO and coal gas conversion. GGL has commissioned operations in new GAs (Jamnagar, Kutch, Dahej, Silvassa), which will gradually contribute ~0.2mmscmd in FY19 and meaningfully from FY20 with the commissioning of high-potential Thane and Ahmedabad.
We remain upbeat on structural prospects given: new CGD coverage in high potential geographies will add ~3mmscmd volumes; robust organic growth (~3mmscmd addition) as PNG has gained further competitiveness. We maintain ‘buy/SO’ with revised DCF-based TP of R1,068, assuming a risk-free rate of 7.6% vs. 6.5% earlier.