Broker's call: Gujarat Gas (Reduce)

Target: ₹564

CMP: ₹620.85

Gujarat Gas (GGL) has hiked CNG price by ₹2.5/kg to partly pass on the APM gas price rise on Oct 1, and gas price for industrial consumers by ₹9.5/scm (25 per cent) to pass on spot LNG surge; GGL had hiked prices for industrial consumers by 13 per cent on August 24.

At futures, as of Oct 5, average spot LNG is at $34/mmbtu in Oct’21–Mar’22. Gujarat Gas’ FY22 margin would depend on its industrial sales volumes in H2FY22e; for volumes in excess of 6 mmscmd, GGL would have to buy expensive spot LNG, which would hit its margins. At H2 industrial volumes of 6–6.5 mmscmd, we estimate FY22e EPS to be up 56-27 per cent y-o-y; but at 7.0-7.5 mmscmd, to be down 2-31 per cent y-o-y. At latest futures, FY23 spot LNG is at $17.6/mmbtu. However, a severe winter may cause record lows in European gas storage which could drive FY23 Asian spot LNG price up further. FY23 spot LNG of $19.4–20.4/mmbtu can support industrial gas volumes of 10 mmscmd while ensuring EBITDA margin of ₹4.5–5.5/scm if gas price for industrial consumers is not cut. However, the moot question is, can industrial volumes rebound to a new high of 10 mmscmd (past peak of 9.6 mmscmd) at current prices?

Spot LNG surge has put Gujarat Gas’ strong volume growth at risk and led to margin uncertainty.

We reiterate Reduce on Gujarat Gas.

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