Gujarat Gas Rating ‘Buy’; a stellar showing by the company

Gujarat Gas’ (GGL’s) H1 and Q2FY21 recurring EPS was up 14-117% y-o-y, driven mainly by jump in Ebitda margin. Q2 volumes are up 5% y-o-y and 138% q-o-q from lows of Q1 hit by lockdown. GGL’s current volumes of ~10.5mmscmd are 7-11% higher than in Q2FY21 and FY20. Q3 Ebitda margin is likely to plunge from the lofty levels of Q2 given 9% cut in Morbi prices in Sep and surge in spot LNG prices. However, we still see upside to our FY21e margin.

We have raised our FY21-FY22e volumes and FY21e margin, which has led to 26-7% upgrade in FY21-FY22e EPS (up 9-19% y-o-y) and 11% rise in target price to Rs 349 (16% upside). Implementation of NGT order of Jul’20 may mean upside to our FY22e volumes. Given the breakout Q2, we upgrade GGL to Buy from ADD.

Margin surge and 5% y-o-y volume rise drive 2.2x y-o-y jump in Q2 EPS: Q2FY21 recurring EPS is up 117% y-o-y, driven mainly by 88% y-o-y rise in Ebitda margin to record high of `8.1/scm. Q2 volumes at 9.85mmscmd are up 5% y-o-y, despite 13% y-o-y fall in CNG and 40% y-o-y fall in commercial volumes, driven mainly by 9% (0.7mmscmd) y-o-y rise in industrial volumes to record high of 7.9mmscmd. H1FY21 recurring EPS was up 14% y-o-y, despite 75% y-o-y fall in Q1, due to strong Q2.

Raise FY21-22e EPS & target price: Ebitda margin of Rs 7.2/scm in H1FY21 means we expect FY21e margin to be at least Rs 5.5/scm (16% up y-o-y) even after factoring in margin fall likely in Q3. FY21e margin may be as high as Rs 6.25/scm. FY21e volume would be 8.8mmscmd if current volumes of ~10.5mmscmd sustain throughout H2. The company expects FY21e exit volumes at 11mmscmd.

However, we are being conservative in upgrading FY21-FY22e volumes by 6% to 8.6-10.3mmscmd and FY21e margin by 9% to Rs 5.5/scm. This has led to upgrade in FY21-FY22e EPS by 26-7%. Higher FY21e margin and FY21-FY22e volumes than now assumed are not ruled out.