Reduce Gujarat Gas; target of Rs 385: ICICI Securities

ICICI Securities recommended reduce rating on Gujarat Gas with a target price of Rs 385 in its research report dated December 28 2023.

Broker Research

January 01, 2024 / 12:43 IST

Reduce

live

bselive
nselive

Volume

Todays L/H

ICICI Securities research report on Gujarat Gas

We downgrade Gujarat Gas (GUJGA) to REDUCE, from Hold, as we turn increasingly worried about the company’s growth trajectory beyond FY25. The recent weakness in LNG prices is a positive (assuming it is not passed through) and drives a material 6/19.1/15.3% upgrade in FY24E/25E/26E EPS, but does not detract from structural worries. Essentially: 1) growth from areas ex-Morbi remains murky, with limited traction observed from the ~INR 43bn capex over FY19-23 and a further INR 36bn estimated over FY24-26E. (volume/EBITDA CAGR over the same period at 8/14%); 2) margins remain volatile and dependent on propane price vagaries; 3) GUJGA’s guidance on margins is cautious, topped with limited visibility on volume growth; and 4) The company’s valuation is still at >20x FY26E EPS, leaving room for more downside risks.

Outlook

We value GUJGA based on the DCF methodology, using a WACC of 10.9%, debt equity ratio (DER) of 25%, long-term EBITDA assumption of INR 5.5/scm. The gradual build up in volumes from multiple new areas under development and new areas won recently in bidding rounds IX/X imply returns from the same would flow through only over the long term. Our DCF valuation delivers a TP of INR 385, offering a 15% downside from CMP.

For all recommendations report, click here