Gujarat Gas a top buy call, target price Rs 370: Motilal Oswal

Motilal Oswal says Gujarat Gas is a top buy with a target price of Rs 370. The share price moved down by -0.43 per cent from its previous close of Rs 322.10. The last traded stock price is Rs 320.70.

With gradual lifting of the lockdown, several units at Morbi have resumed operations. Gujarat Gas is also ramping up its capacity at Morbi. The brokerage’s recent interactions with the company suggests that 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. The brokerage says total volumes should reach pre-Covid-19 levels by mid to end of second quarter of FY21, largely due to a lag expected in demand recovery in CNG, where normalcy is expected in the third quarter).

Investment Rationale

Domestic APM (administered price mechanism) prices have declined for the Apr–Sep’20 period. The recent demand destruction due to Covid-19 has led to a huge global inventory buildup, and spot prices have tumbled to $2/mmbtu currently. Assuming APM and LT contracts are crude-linked, Gujarat Gas has the highest spot volumes of 43 per cent against 10–14 per cent for Indraprastha Gas Ltd (IGL) and Mahanagar Gas Ltd.

The brokerage reiterates Gujarat Gas as a top buy at Rs 370, valuing it at 22 times FY22E EPS, with the best RoE profile of 23-26 per cent and expected free cash flow generation of Rs 21.3 billion over the next two years.

EBITDA/scm to normalise at current levels


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.