Gujarat Gas Rating: Buy; volumes at an all-time high in November

We present the highlights from investor interactions with Gujarat Gas (GGL) at Edelweiss India e-Conference 2020, Asia Pacific. GGL clocked all-time high volume of 10.5mmscmd-plus in Nov on the back of strong industrial volumes (Morbi and Ankleshwar) and recovery in CNG demand to ~100% of pre-covid-19.

GGL expects a 10%-plus volume CAGR as the ban on polluting fuels accelerates. It shall add 3x per year CNG stations with direct control exceeding 50%, among the industry’s highest. Mgmt raised the long-term Ebitda margin guidance to Rs 5/SCM, which remains sub-peers. A 30–40% rise in capex guidance shall be financed entirely out of internal accruals. Maintain Buy with a TP of Rs 373 at 18.7x FY22e PER.

Key takeaways: GGL operates 450 CNG stations at a modest 17–18% utilisation. It plans to add 150 CNG stations each year, 3x of earlier levels and 75% of which shall be in new geographies.

After six quarters of coal gas ban, GGL is now more confident of Ebitda margins sustaining closer to Rs 5/SCM in the long term versus recent guidance of Rs 4.5–5. GGL believes it has the ability to pass on the 3x q-o-q temporary spurt in spot LNG prices as competing LPG is typically 40% more expensive. GGL is not stressed about competition once open access materialises as it has perhaps the lowest Ebitda margins/SCM.

Outlook: Growth abounds – While the NGT has banned pet coke and fuel oil usage across India, implementation may take a bit of time. A significant further surge in volumes is eventually likely, which the market hasn’t factored in. Most of the new stations are coming up on outskirts and highways, some along with LNG dispensing facilities. This may not only accelerate the rollout of new CGD networks nationwide, but in the near future, drive network utilisation higher and hence profitability. We retain ‘BUY/SO’.