Broker's call: Gujarat Gas (Buy)

Target: ₹560

CMP: ₹484.85

Gujarat Gas has proved to be a clear outperformer since the curbing of polluting fuels at Morbi – an impetus by the government toward the adoption of greener fuel. Since our upgrade in Dec’19, the stock is up 116 per cent – it has outperformed the Nifty by about 95 per cent – despite which the stock trades at 21x FY23E EPS currently.

Interestingly, we have upgraded our EPS every quarter since then (from ₹12.3 to ₹19.9 for FY22) on the back of better-than-expected volume growth.

Gujarat Gas has clocked volume growth of about 8 per cent q-o-q each time since Q1FY20 – despite the Covid-led disruption witnessed in H1-FY21. Over the past five years, the company has posted a volume CAGR of about 11 per cent; we build in the same volume growth over the next two years as well.

The Ceramic Association of Morbi expects growth of 25–30 per cent in FY22 (v/s about 15 per cent in FY21) as 60 more industrial units are likely to be commissioned over Oct–Dec’21 and the current units would undergo further expansions. Also, we have been highlighting that any further pollution control measure or impetus on growing gas consumption in India hereafter would benefit GUJGA significantly (v/s the other two incumbents).

We value the stock at 24x (from 22x earlier) to arrive at Target Price of ₹560/share. Reiterate Buy, with the possibility of further earnings upgrades going forward.