Post ban on coal gasifiers in Morbi, Gujarat Gas has seen an uptick in volumes, which led to a strong performance in Q1 FY20, beating expectations. The company also saw strong improvement in profit and margins. Post the healthy results, the stock saw a strong traction in trade.
Key result highlights
-Revenue was up 47 percent year-on-year (YoY) on the back of improved volumes across segments and better gross margins.
-Total volume was up 42 percent YoY. This was majorly due to the ban of the coal gasifiers in Morbi in Gujarat, by the National Green Tribunal (NGT), which led to demand jump for industrial gas from ceramic manufacturers.
-Earnings before interest, tax, depreciation and amortisation (EBITDA) was up 87 percent YoY, with lower gas sourcing costs and more efficient sourcing of spot cargoes.
-The quarter saw a big jump of 376 basis points (bps) in EBITDA margin and 334 bps in profit after tax (PAT) margin on the back of benign LNG prices and a better gas sourcing mix.
-The company did not take any price revisions during the quarter. However, it revised down its prices for industrial consumers by Rs 2.5 per scm (standard cubic metre) on July 2 in order to pass on the benefit of benign LNG prices.
We believe that with the implementation of the NGT ruling, the expansion in volumes is sustainable. With continued demand from the ceramic manufacturers in Morbi, higher offtake from existing consumers and sales to other smaller players shifting to gas, the volume growth would continue. Moreover, similar regulatory ruling in other regions like Surat, Bharuch and the like could bring in added demand.
In the CNG and domestic PNG segment, we expect good performance to continue with rising demand and deeper penetration in existing geographies. Allocation of new geographic areas (GAs) in city gas distribution (CGD) bidding is an additional growth driver for future.
At current prices, the stock is trading at a 2020e price to earnings of 20.5x. With sustained strength in volumes and softness in LNG prices, the situation remains favourable. We would recommend keeping the stock on the radar and buying on dips.
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