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Centrum Broking
Gujarat Gas (Buy)
CMP: ₹216.65
Target: ₹255
The National Green Tribunal (NGT) has ordered a comprehensive action plan (by January 31, 2020 by the State Pollution boards and a consolidated report by February 15, 2020 by Central Pollution Board to control pollution in identified polluted industrial requiring the statutory authorities to take action by way of closure, prosecution and recovery of compensation from identified polluters in said clusters.
Given 3/4th of Gujarat Gas volumes come from industrial/commercial segment, this order sets up multiple levers for growth: In its areas of Surat/Ankleshwar/Bharuch/Vapi, the company can theoretically recapture 1.5-1.7 mmscmd of volumes lost over the last few years to other Petroleum fuels (FO/Petcoke etc); Newer areas such as Dahej/Thane/Dadra Nagar Haveli, etc, haven’t seen much gas penetration, which can gain momentum; and given this order, we see limited approvals for any capacity expansions based on fuels other than gas, driving more migration to gas for units looking to enhance capacity.
Valuation: GGL remains in a strong space therefore, with the combination of a benign pricing environment, aggressive expansion into new areas and this regulatory thrust to combine in a delivery of sustained profitability growth over the next 5-7 years. We, therefore, reiterate it as our top pick within the gas space.
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