Gujarat Gas Q1 Results Review - Competition Eroding The Margins; Downgrade To 'Sell': Systematix

Systematix Research Report

Gujarat Gas Ltd.'s Q1 FY24 results were significantly below our expectations on the back of a sharp contraction in the Industrial piped natural gas margin owing to stiff competition from alternate fuel i.e. propane.

Volume increased 4% QoQ to 9.2 million metric standard cubic metre per day (our estimate 8.7 mmscmd) as IPNG/CNG volume increased 10%/3% QoQ to 5.9/2.6 mmscmd while dense phase natural gas/CPNG volume was own 28%/7% to 0.6/0.1 mmscmd.

However, despite lower LNG prices, overall Ebitda/standard cubic metre declined 33% QoQ to Rs 4.7/scm as focus on volume at Morbi led to a series of price cut which impacted the margin.

Currently, volume from Morbi is in tune of 4 mmscmd while nearly 3 msmcmd is getting fulfilled by propane while the total potential could be around 8-8.5 mmscmd.

Overall, Gujarat Gas is shifting is focusing more on CNG and looking to invest onethird of Rs 10-12 billion capex for compressed natural gas infrastructure.

Also, Gujarat Gas has cut Ebitda margin guidance to Rs 4.5-5.5 per scm from earlier Rs 6.5-7.5/scm. Accordingly, we cut our volume estimates by 9.6%/5% for FY24E/FY25E while cut Ebitda/scm estimate to Rs 5.1/5.8 from earlier Rs7.0/8.0, respectively.

Therefore, we cut our Ebitda estimates by 32%/30% to Rs 18/22.5 billion for FY24E/FY25E. We, consequently, cut our target price to Rs 386 from earlier Rs 528 and downgrade the stock to 'Sell' from earlier 'Hold'.

We believe the threat of propane is here to stay for a longer period of time and volatility in LNG prices would keep pressure on IPNG margins. Though, new geographical areas, current lower spot LNG prices and increased contribution from CNG are a few tailwinds but risk on IPNG margin remains a potential threat.

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