We are recommending Buy on our Actionable ViewPoints "Gujarat Gas" as per following:-
CMP: Rs 126 Target: Rs 151 (20% Upside)
Key Points:
Gujarat Gas Limited - Viewpoint: Margins surprise positively; weak volume growth disappoints
· Substantial beat in operating profit led by higher-than-expected margins, volume growth disappoints at 4.1% y-o-y: For Q3FY2019, the operating profit of Gujarat Gas Limited (GGAS) stood at Rs. 321 crore (up 60.7% y-o-y; up 61.1% q-o-q), substantially higher than our estimate of Rs. 253 crore on account of beat in EBITDA margin at Rs. 5.3/scm (up 54.3% y-o-y; up 63.6% q-o-q vs. our estimate of Rs. 4/scm). However, volume growth at 4.1% y-o-y to 6.6mmscmd was weaker than our estimate. Of the total gas sales volume, industrial gas volume grew by only 2.5% y-o-y to 4.5 mmscmd, CNG volume increased by 10% y-o-y to 1.4 mmscmd, domestic PNG volume increased by 4.2% y-o-y to 0.5 mmscmd and commercial PNG volumes was flat y-o-y at 0.1 mmscmd. Adjusted PAT of Rs. 151 crore (up 2.5x y-o-y; up 2.2x q-o-q) was substantially above our estimate of Rs. 91 crore due to higher-than-expected operating profit, higher-than-expected other income (up 69.6% y-o-y) and lower-than-expected effective tax rate at 30.1% (vs our assumption of 34%).
· Outlook – volume CAGR guidance of 10% over 2-3 years; margin to normalize at ~Rs4.7/scm: The management has guided for volume CAGR of ~10% over the next 2-3 years, which would be driven by switchover to gas from liquid fuels by the industrial customers and volume ramp-up at new geographical areas (GAs, including Dahej, Silvassa, Thane extension, Panchmahal, Hazira, Dahod, Amreli and Kutch West). We, thus model a volume CAGR of 9% for GGAS over FY2019E-FY2020E. The management has highlighted that the company has bid for 11 GAs under 10th city gas distribution (CGD) bidding round. On the margin front, we believe that Q3FY2019 EBITDA margin would not be sustained as the company has taken price cut of Rs2.75/scm in the industrial segment in January 2019. Thus, we expect EBITDA margin to normalize at ~Rs4.7/scm as compared to high of Rs. 5.3/scm in Q3FY2019.
· Valuation – Maintain Positive view with 20% upside potential: We lowered our FY2019E-FY2020E EPS to factor in lower volume growth for the industrial segment due to volatility in the industrial gas demand on back of fluctuation in the economics of gas cost vs that of liquid fuels. We have also introduced our FY2021E EPS of Rs 8.6. We have also factored in a stock split to Rs2/share from Rs10/share. We expect volume growth from industrial customers to revive gradually as we expect LNG price to remain low at $7-8/mmbtu in the medium term given LNG supply glut. We thus expect earnings CAGR of 15% over FY2019E-FY2021E for GGAS with healthy RoE of 21-22%. Hence, we maintain our positive view on the stock and expect 20% upside potential from current level. At CMP, the stock is trading at 16.5x FY2020E EPS and 14.7x FY2021E EPS.
Regards,
F1,Achyuta,111,bharathidasan salai,
Cantonment
Trichy-620001
Tel:04314000706
Ph:8144517351
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