Buy Gujarat Gas, target price Rs 339: Edelweiss

Edelweiss has given a buy rating to Gujarat Gas Ltd. with a target price of Rs 339. The share price moved up by 0.61 per cent from its previous close of Rs 292.75. The last traded stock price is Rs 294.55.

Gujarat Gas’ Q4FY20 EBITDA at Rs 4.3 billion (up 67.9 per cent year on year) beat consensus by 3.4 per cent, although it missed the brokerage estimate.

According to the brokerage, Gujarat Gas has not realised benefits from collapse in spot LNG prices this year, with unit raw- mat flat quarter on quarter in Q4FY20. As these benefits start to kick in from Q1FY21, the company has significant scope to expand gross margin as competing fuel, LPG, prices remain elevated. On the other hand, unit opex will rise due to negative operating leverage, partly offsetting increase in gross margin. The brokerage estimates unit EBITDA margin will rise to INR4.9/scm in FY21.

Investment Rationale

The brokerage estimates that gross margin will rise from the first quarter of FY21 as this kicks in, widening the input cost LPG (alternate fuel) differential. Volumes at 9.9mmscmd beat estimates (9.1 mmscmd) with pre-Covid-19 run-rate at 10.5mmscmd, driven by Morbi. Exit run-rate for Q1FY21 is likely to triple to 6.5mmscmd versus April as Morbi demand recovers. For FY21, the brokerage has built in a 17 per cent year on year volume decline due to Morbi weakness, while EBITDA should decline by a lower 13 per cent due to higher unit margin. The brokerage maintains a buy rating with DCF-based target price of Rs 339/share (implied 27 times FY21E price earning ratio, in line with long-term average). The stock price factors in near-term volume weakness, while ignoring upside potential from the National Green Tribunal mandated switch to gas.

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.