Gujarat Gas (GGAS) posted an 11% yoy growth in its 2Q volumes to 5.7mmscmd led by growth across segments. A significant miss in the EBITDA was due to flood donations, lack of input tax credit, and an increase in spot LNG prices. While the recent increase in oil/spot LNG would hurt near-term margins, a higher increase in CNG prices should partly offset the impact. We expect a 13% volume CAGR over FY17-FY20E to 7.8mmscmd on (1) higher volumes from ceramic customers and (2) a pick-up in liquid-to-gas conversion in new geographies on lower gas prices. We slash FY18E/FY19E EPS by 22%/9% on lower volume expectations and forecast a 20%/36% EBITDA/PAT CAGR over FY17-FY20E off a low base. Post its recent rally, the stock is trading expensive at 30x FY19E. We roll over to a DCF-based Mar’19 TP of Rs 900. Downgrade to REDUCE (from Sep’18 PT of Rs. 780).
In-line volumes: Volumes at 5.7mmscmd were up 11% yoy and down 6% qoq, in line with EE. CNG/household/commercial/industrial volumes grew 7%/5%/0%/13% yoy to 1.3/0.5/0.1/3.9mmscmd. Q2 is seasonally weak quarter due to monsoons, but this time GST implementation led to a slowdown in Morbi volumes. The company’s focus is to expand CNG volumes with a ~20% increase in CNG stations planned this year.
Volume growth likely from Q4 but dependency on Morbi continues: We expect a qoq improvement in Q3 volumes, but see sharp growth in Q4 when (1) new plants come up in Morbi (2) alternate fuels, mainly LPG, become expensive in winter, and (3) NG comes under the taxation net due to inclusion in GST. However, low contribution from new GAs would make GGAS dependent on Morbi for volume growth over the next 1-2 years.
Lack of price increases to hurt near-term margins: Despite the recent run-up in crude oil/spot LNG, GGAS did not take price hikes in the industrial segment, possibly due to upcoming state elections; this in turn is likely to pressurize margins. However, a CNG price hike of Rs 3.5/KG taken in Oct’17 would give partial relief. With a recovery in volumes, the company’s pricing power should improve from Jan’18. We expect FY18E/FY19E EBITDA/scm of Rs 4.1/4.5scm against Rs 3.7/scm over the last two years.
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EBITDA miss due to one-offs: Topline grew 12% yoy to Rs 13.9bn, in line EE, and realizations stood at Rs 26.4/scm, up 2% qoq. However, EBITDA/scm at Rs 3.8/scm missed estimates on (1) Rs 70mn given towards flood relief fund, and (2) Rs 80mn-100mn impact due to lack of input tax credit for GST cost items. EBITDA declined 25% qoq/3% yoy to Rs 2bn while PAT at Rs 0.6bn was down 12% yoy.