Gujarat Gas Ltd. share price target

Robust volumes mostly driven by industrial and domestic PNG segment. Healthy EBITDA spreads. Maintain Accumulate. Gujarat Gas results were in line with estimates on revenue and above estimates on profitability front. Volumes were at 905 mmscm which was an increase of 54.7%YoY and of 5.6% QoQ, with industrial segment growing at 82.3% YoY and of 7% QoQ. Major growth in industrial segment has come from Morbi region (75%) despite worries over anti-dumping duty by GCC for ceramic industry....

Building Materials: Lockdown to mar near-term prospects; structural drivers intact. Weekly Eco Wrap: Markets hopeful of a flattening COVID curve. March MPC Minutes: Growth concerns warranted a larger cut. Inflation: Inflation falls, will ease further

Our recent interaction with the Gujarat Gas (GUJGA) management reinforces our core investment thesis.

Crude prices witnessed a sharp decline in March due to spread of Covid-19 across the globe and Opec deal failure. A likely increase in oil output by both Saudi Arabia and Russia from Q1FY21E and lower demand are expected to lead to a sizeable oversupply in the oil market. Subsequent low oil prices are expected to significantly affect ONGC's profitability....

Crude prices witnessed a sharp decline in March due to spread of Covid-19 across the globe and Opec deal failure. A likely increase in oil output by both Saudi Arabia and Russia from Q1FY21E and lower demand are expected to lead to a sizeable oversupply in the oil market. Subsequent low oil prices are expected to significantly affect ONGC's profitability....

25 February 2020 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 USD6.0/mmBtu in 2019 to below USD3/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. It has already levied INR4b of fine on the Morbi cluster in 2019. We believe that further volume boost like Morbi could come up 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 already shifted to dirtier fuels.

RMTL's order book as on February 1, 2020 was at | 1569 crore. Higher margin SS order book was at | 516 crore (| 536 crore as on October 1, 2019) and CS orders of | 1053 crore (| 1390 crore as on October 1, 2019). This is the third consecutive quarter wherein higher margin SS orders have stayed above the | 500 crore mark, auguring well for RMTL. In terms of domestic and exports mix, domestic orders were at | 1121 crore while export orders were at | 448 crore. Of the | 1121 crore domestic order book: | 403 crore is in the SS segment while balance | 718 crore is in the CS segment. Of the | 448 crore...

We believe that GGL will pass on partial benefit of falling RMC to industrial customers. This will ensure sustainability of volumes but will keep Gross Margins under pressure. The company will enjoy operating leverage led by increased volumes, which enable GGL to maintain per unit EBITDA (~Rs 4.3/scm over FY20-22) compared to Rs 4.96 in 1HFY20. We change our FY20/21/22E EPS estimates to factor in the 9M performance by -0.9/+0.4/1.2% to Rs 12.4/12.3/14.1 (vs the consensus of Rs 13.8/21.6/29.5). We downgrade GGL to Neutral despite an in-line EBITDA/PAT in 3QFY20, owing to 5.9% lower volumes than anticipated. Our TP is Rs 273, 20x Dec-21x EPS, versus the consensus TP of Rs 267.

5 February 2020 Reported EBITDA marginally exceeded our estimate (by 5%) owing to higher- than-expected EBITDA/scm of INR4.3. Volumes were in line with our estimate at 9.2mmscmd. The National Green Tribunal has mandated penalty against the Pollution Control Boards that do not comply with its Nov19 order of curbing pollution in critically and severely polluted industrial clusters across India. We have already noted that the NGT order did pan out strongly at Morbi, and any such order could further benefit GUJGA, industrial being its largest segment. Reduced interest cost was offset by lower other income. the company took DTL benefit in 2QFY20). For 9MFY20, EBITDA was up 65% YoY at INR12.1b, supported by the NGT ban at Morbi volumes from 1QFY20. PBT doubled to INR8.8b (v/s INR4.4b YoY), while PAT stood at INR9.

At our recent meeting, GUJGA's management assured robust outlook on volumes driven by (a) implementation of anti-pollution measures by the state government (new CNG state buses), and (b) relatively low LNG prices.