The brokerage reiterates that Gujarat Gas is its top buy.
Motilal Oswal has a buy rating on Gujarat Gas with a target price of Rs 370, valuing it at 22 times FY22E EPS. The share price moved down by -0.68 per cent from its previous close of Rs 292.55. The stock’s last traded price is Rs 290.55.
Total sales are currently at 70–75 per cent of normal volumes, with strong demand from pharma and agrochem units in Ankleshwar, Panoli, Vapi, and others, says the brokerage. Morbi volumes are currently at around 3.5mmscmd with almost 500 units operational). Gujarat Gas expects a ramp-up to 4–4.5mmscmd by the end of the month. Demand for various products is strong, but their manufacturing needs to be streamlined. Labour issues would be resolved gradually, which is critical for recovery in the present time. In Gujarat, each year most employees return to their hometowns for the sowing season and are back within the next one to two months.
Investment Rationale
According to the brokerage, Gujarat Gas’ growth in FY20 is entirely attributable to Morbi, wherein the overnight shift to gas has led to a major boost in demand. PNG I/C clocked growth of 61 per cent year on year to 7.4mmscmd (up 2.8mmscmd) in FY20, and CNG/PNG Domestic grew 4 per cent/7 per cent year on year. According to the National Green Tribunal’s list of critically/severely polluted industrial clusters, Gujarat has five clusters, wherein a boost in volumes (such as in Morbi) could be witnessed.
Thus, according to Motilal Oswal, Gujarat Gas could see a major boost in volumes owing to NGT’s stringent directives, which should drive a volume CAGR of ~10 per cent over the medium term on the highest volume base among peers.
Domestic APM prices also declined for the Apr–Sep’20 period. The recent demand destruction due to Covid-19 has led to huge global inventory buildup, and spot prices have tumbled to $2/mmbtu currently.
The brokerage reiterates that Gujarat GAs is its top buy. It has the best RoE profile of 23–26 per cent and expected FCF generation of Rs 21.3 billion over the next two years or Rs 31/share resulting in 11 per cent FCF yield. Also, assuming a 5 per cent terminal growth rate for Gujarat Gas, the DCF-derived target price stands at Rs 433, implying an upside of 55 per cent.
Financials
For the quarter ended March 31, 2020, the company reported consolidated sales of Rs 2666.63 crore, up 3.99 per cent from last quarter sales of Rs 2564.25 crore and up 39.79 per cent from last year's same quarter sales of Rs 1907.55 crore. The company reported net profit after tax of Rs 251.42 crore in the latest quarter.
Promoter/FII Holdings
Promoters held 60.89 per cent stake in the company as of March 31, 2020, while FIIs held 9.83 per cent, DIIs 6.85 and public and others 22.24 per cent.
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