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Equirus Securities
Gujarat Gas (Add)
CMP: ₹662.75
Target: ₹774
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Post our recent upgrade on Gujarat Gas to ‘Add’ from ‘Reduce’, margin tailwinds have grown stronger amid falling oil prices and rupee stability. While the oil price decline will make liquid fuels attractive to some industrial users and affect industrial volume growth, the stock price is unlikely to see as sharp a correction as during the last oil-price softening cycle.
Gujarat Gas has always been expensive to peers despite poor and volatile earnings, partly due to investor expectations on its long-term volume growth and margin recovery potential. We expect it to deliver on both fronts, with EBITDA/scm set to touch ₹4.3 in next 2 years and a 15 per cent EBITDA CAGR over FY19-FY21E. Strong operating profit and steady capex would sharply bring down interest costs, driving a 32 per cent EPS CAGR and about 400 bps RoE expansion over FY19-FY21E. We raise FY20E EPS by 6 per cent and revise our March 2020 DCF-based TP to ₹774 (from ₹718).
Risks to our view: a) Higher LNG prices and significant INR depreciation; b) Delayed industrial recovery.
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