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Target: ₹679
CMP: ₹466.80
The onset of Russia-Ukraine conflict brewed an unavoidable storm for Gujarat Gas with spot LNG price spiraling to $34.5/mmBtu in H1-FY23 from $23.4/mmBtu in FY22. Brent also surged to $107/bbl in H1-FY23, thereby escalating costs for Gujarat Gas’ long-term, crude-linked contracts. The storm intensified further as Morbi’s ceramic cluster was shut down for a month in Q2-FY23, thus severely impacting industrial volumes.
As a result, PNG price rose to ₹63/scm by May 2022, before dipping to ₹46/scm currently. Higher prices forced consumers, especially at Morbi, to switch to cheaper alternatives such as propane and LPG.
However, the storm now seems to be running out of steam with spot LNG prices declining 48 per cent from its peak. Addition of 18.1mmt of effective liquefaction capacity globally in CY23 (v/s 11mmt addition in CY22), could push gas prices further down, thereby making PNG lucrative than alternate fuels.
Gujarat Gas has an RoCE of about 25 per cent. We expect an FCF generation of about ₹1,700 crore over FY23-24.
The company is likely to turn net cash in FY23E, despite capex plans of ₹2,000 crore over FY23-24E. We maintain our Buy rating on the stock with a TP of ₹679 (based on 28x December 2024E EPS). Slower-than-expected pick-up in volume or high gas prices adversely impacting both volume as well as margin can pose a key risk to our recommendation.
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