SELL Gujarat Gas Company; target of Rs 570: ICICI Direct

ICICI Direct's reserach report on Gujarat Gas CompanyGujarat Gas, the new amalgamated entity, is India’s largest city gas distribution (CGD) company with a presence across 19 districts in Gujarat and the Union Territory (UT) of Dadra Nagar Haveli and Thane. The new CGD entity has a gas pipeline network of 15000 km and 235 CNG stations constituting 23% of all CNG stations in India. Gujarat Gas has India's largest customer base in major user segments and currently supplies 6.3 mmscmd of natural gas to 38% of all domestic customers (~10,28,000),53% of all commercial customers (~11,500) and 47% of all industrial customers in India (~2,750). Gujarat Gas will be a direct play on India’s city gas distribution business, which is expected to grow steadily over the next few years. The new entity, Gujarat Gas, will start trading on the BSE and NSE from September 15, 2015.Although Gujarat Gas presents an opportunity to have an exposure to the robust business model and growing CGD space, the current price appears to be rich, compared to other gas distribution companies. Hence, we recommend looking at the stock at lower price levels. In the near term, the volume growth and margins would be the key triggers for the stock. Over the long term, we believe the company’s strong CGD network offer good demand potential due to lower CNG and residential PNG penetration and increased usage of natural gas for industrial volumes. Currently, we value Gujarat Gas based on the DCF methodology to arrive at a target price of | 570 (WACC – 12%, terminal growth – 3%). For all recommendations, click here Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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