Mr. Nilesh Ghuge & Mr. Harshad Katkar, Institutional Research Analyst, HDFC Securities.
Our ADD recommendation on Gujarat Gas (GGL) with a price target of INR 326 is premised on (1) volume growth of 20% CAGR over FY21-23E, (2) portfolio of mature, semi-mature and new geographical areas (GAs) and (3) compelling valuations among the city gas distribution players (RoE of 27% in FY22E versus 20% for peers - Indraprastha Gas and Mahanagar Gas). 1QFY21 EBITDA/APAT was 26/49% below estimates, primarily owing to 31% lower volumes at 4.1mmscmd, offset by 7% higher per unit EBITDA margin.
Volumes: Blended volume stood at 4.1mmscmd (HSIE 6.0), dragged by weak industrial demand (2.9mmscmd or 69% of volume mix versus 77% in FY20). Volume numbers cannot be compared on a YoY or QoQ basis because of the adverse impact of the nationwide lockdown in 1Q. Blended volumes have recovered to 9.5mmscmd in 2QFY21 as per the management. 13 CNG stations were commercialised in 1Q taking the company's total station tally to 413.
Margin: Per unit gross spread expanded by INR 2.3/1.4 QoQ/YoY to INR 9.4/scm. This is attributable to part retention of the benefit of falling RMC. APM (30% of 1Q sourcing mix) declined to USD 2.39/mmbtu in Apr-20, -26/-35% QoQ/YoY and Asian spot LNG price (64%) declined to USD 2.8/mmbtu in 1QFY21, -43/-48% QoQ/YoY. Per unit EBITDA came to INR 4.9/scm (vs. INR 4.7 per scm in FY20).
Change in estimates: We raise our FY21E per unit EBITDA margin estimates by 2% to INR 4.5/scm to factor in the company's 1QFY21 performance, leading to a 1% increase in EPS estimates to INR 11.0/sh.
DCF-based valuation: Our target price of INR 326 is based on Mar-22E free cash flows (WACC 11%, terminal growth rate 3.0%). The stock is currently trading at 17.4x FY22E EPS.
Shares of Gujarat Gas Ltd was last trading in BSE at Rs.308.25 as compared to the previous close of Rs. 309.65. The total number of shares traded during the day was 200524 in over 5356 trades.
The stock hit an intraday high of Rs. 312.9 and intraday low of 297.75. The net turnover during the day was Rs. 61501599.