Sharekhan's research report on Gujarat Gas
Gujarat Gas Limited’s (GGAS) management has guided for strong 10% q-o-q volume growth to ~10.8mmscmd in Q3FY21; however, management expects margins to contract sharply to ~Rs 4.2/scm (vs. Rs 8.1/scm in Q2FY21), given discount on industrial PNG to Morbi ceramic customers. Margin contraction in Q3FY21 is a concern and could keep the stock price volatile in the near term; however, recent roll-back of Rs. 4/scm discount on industrial PNG would improve the margin back to Rs. 5-5.5/scm in Q4FY21. Moreover, volume growth guidance of 10%-12% p.a. to drive strong 20% PAT CAGR over FY20-FY23E along with high RoE of 27.5% Potential NGT crackdown of polluting industrial areas in Gujarat and ramp-up of volume from 7 new GAs provides strong impetus for sustained high volume growth. GGAS is one of the best bets in the CGD space as consistent high-volume growth and potential to become net cash positive by FY22 makes valuation of 16.8x its FY23E EPS attractive.
Hence, we maintain our Buy rating on GGAS with a revised PT of Rs. 452.
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