Gujarat Gas gains 3% as analysts retain bullish view, see double digit-return post Q4

CLSA also feels Gujarat Gas reported robust Q4 performance, though the nationwide lockdown drove EPS estimates and target price cut.

"Volume rose 53 percent YoY in Q4 but may slump 60 percent QoQ in Q1FY21 due to lockdown. Model normalisation of volumes is seen only in Q3 and a 22 perccent YoY fall in FY21 volume," said the global brokerage adding lower volumes drove 39/6 percent cut to FY21/22 EPS estimates.

Depressed LNG prices along with falling domestic gas prices should lower raw material cost, said CLSA while reiterating buy call, and cut price target to Rs 345 from Rs 360 per share.

Gujarat Gas reported better-than-expected numbers in Q4 with volumes at record high at 9.9mmscmd despite lockdown (against 9.3 mmscmd in Q3FY20 and 6.4 mmscmd in Q4FY19).

Profit grew by 27 percent sequentially to Rs 250.5 crore on revenue of Rs 2,666 crore that rose by 6.4 percent QoQ during the quarter ended March 2020.

Earnings before interest, tax, depreciation and amortisation (EBITDA) increased by 15 percent to Rs 423 crore and margin expanded by 120 basis points to 16 percent in Q4FY20 YoY.

Numbers were ahead of analysts expectations. Profit was estimated at Rs 231 crore on revenue of Rs 2,536 crore and EBITDA was expected at Rs 409 crore with margin at 16 percent for the quarter, according to the average of estimates of analysts polled by CNBC-TV18.

Morbi volumes were strong at 5.6-5.7 mmscmd in Q4FY20

"Gujarat Gas's Q4FY20 EBITDA was 4 percent higher than the estimate. This was led by higher-than-expected volumes at around 9.9mmscmd (of this, industrial volumes stood at 7.7mmscmd) with EBITDA/scm at Rs 4.7/scm in the quarter," said Motilal Oswal which reiterated the stock as its top buy (at Rs 370 valuing it at 22x FY22E EPS), with best return on equity (RoE) profile of around 24-26 percent and expected free cash flow (FCF) generation of Rs 2,130 crore over the next 2 years.

JM Financial also said Gujarat Gas's Q4 FY20 EBITDA and PAT significantly beat its estimates due to continued strong volume growth despite the nationwide lockdown.

"Margins continued to be robust, although largely as expected. Despite the near-term hit to volumes due to COVID-19, we sharply raise our estimates for FY22 and beyond due to: a) increase in our volume estimate, given the sharp rise in gas use by industrial consumers due to NGT's March 6th, 2019 order banning the use of coal-based gasifiers in Morbi and b) strengthening margin profile due to improved competitiveness of gas led by lower domestic gas and spot LNG prices," it added.

Hence, JM Financial sharply raised its DCF-based TP to Rs 330 per share and upgraded the stock rating to buy as it expects Gujata Gas's volume growth and pricing power to sustain going forward.

In the financial year 2019-20, Gujarat Gas registered a 186.5 percent rise in consolidated profit at Rs 1,198.82 crore and 32.8 percent growth in revenue at Rs 10,300 crore compared to previous year.

"The growth in FY20 is completely attributable to Morbi, where the overnight shift to gas from dirtier fuel led to the huge demand boost. PNG I/C clocked growth of 61 percent YoY to 7.4mmscmd (up 2.8mmscmd) in FY20, while CNG/PNG-Domestic grew 4/7 percent YoY," said Motilal Oswal.

"According to the NGT's list of critically/severely polluted industrial clusters, Gujarat has five clusters where the volume boost (like Morbi) could come up. Thus, Gujarat Gas has a huge advantage of volume boost from the NGT's stringent directives, which should drive volume CAGR of around 10 percent over the medium term on the highest volume base among its peers," the brokerage added.

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