Gujarat Gas Limited (GGAS) reported weak Q2FY22 results with 38%/44% miss in operating profit/ PAT at Rs. 421 crore/Rs. 249 crore, down 42.6%/47.5% y-o-y. The sharp miss in earnings was on the account of weaker-than-expected EBITDA margin at Rs. 4/scm, as gas cost increased sharply by 62%/27% y-o-y/q-o-q to Rs. 28.4/scm due to a steep rise in spot LNG prices to average of $14.5-15/ mmbtu in Q2FY22. Volume recovery was on expected lines and witnessed strong 15.9% y-o-y growth to 11.4 mmscmd and current run-rate is at 12 mmscmd (5% higher than Q2 average volumes). Within the Industrial PNG segment, gas sales volume to Morbi cluster’s ceramic customers increased to 6.4 mmscmd (up 14% q-o-q) while non-Morbi volumes grew by 4.5% q-o-q to 2.3 mmscmd.
The recent sharp 16% correction in GGAS’ stock price in last three months factors in near term margin concerns and provides attractive entry opportunity as gas sales volumes growth outlook (supported by regulatory push to curb pollution and ramp-up of new GAs) remains intact for GGAS. Strong volume growth (expect a 20% CAGR over FY21-24E) and proactive pricing action to protect margins would result in robust 22% PAT CAGR over FY21-24E and superior RoE/RoCE of 29%/32%. Hence, we maintain our Buy rating on GGAS with a revised PT of Rs. 840. At CMP, the stock trades at 21.6x/17.7x its FY23E/FY24E EPS.
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