25 February 2020
Company Update | Sector: Oil & Gas
TP: INR340 (+17%)
Lower LNG prices bode well for profitability
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
Free float (%)
199.6 / 2.8
313 / 116
GUJGA has a long-term contract with Shell which will expire gradually by
2024. Volumes under the contract have already reduced from 2.5mmscmd
to 2.2mmscmd and are expected to decline to 2mmscmd from 2020.
Due to the supply glut globally, LNG prices have declined from
USD6.0/mmBtu in 2019 to below USD3/mmBtu this year. Replacement by
low-cost LNG would improve profitability.
The company is also ramping up its capacity at Morbi to enable it to handle
Financials & Valuations (INR b)
EPS Gr. (%)
Div. Yield (%)
FCF Yield (%)
Shareholding pattern (%)
FII Includes depository receipts
Stock Performance (1-year)
Sensex - Rebased
NGT order may provide further volumes boost
In Nov’19, the National Green Tribunal (NGT) had stipulated strict action
against pollution control boards that do not comply with its Jul’19 order. It
has already levied INR4b of fine on the Morbi cluster in 2019.
We believe that further volume boost like Morbi could come up across the
country. Gujarat is home to critically/severely polluted industrial clusters
such as Rajkot, Ankleshwar, Batala, Bhavnagar, Tarapur and Vapi. Any
development on this front could boost volumes significantly.
GUJGA stated that customers with volumes of 2-2.5mmscmd had already
shifted to dirtier fuels. However, strict environmental compliance may result
in a large number of these consumers returning to gas.
CNG – attractive prospects
GUJGA is expected to come up with ~100 CNG stations in three years. This
would increase the reach of CNG in the state and encourage conversion.
With the increasing number of CNG stations and the focus on reducing
vehicular pollution, penetration in CNG segment is expected to increase.
Gujarat is home to ~78,000 buses, 90,000 taxis and 8.5 lakh autos (link).
However, GUJGA sells only 1.5mmscmd of CNG compared to 4.9mmscmd by
IGL. With improving ecosystem, CNG holds bright future for GUJGA.
Valuation and view
The NGT order has panned out strongly at Morbi. Gujarat is facilitated by
better availability of gas/pipeline infrastructure and already has a high
market share of natural gas in its energy mix (~25%).
Given lower LNG prices, we have modeled EBITDA/scm for the company at
INR4.5/INR4.5, with volumes growth forecast of 10% for FY21/22.
GUJGA trades at 21.2x FY21E EPS of INR13.5 and 11.8x FY21E EV/EBITDA.
We value the company at 22x FY22E EPS to arrive at a target price of INR340
and reiterate Buy rating.
Jump in LNG prices and open access remain the biggest risks to our rating.
Swarnendu Bhushan- Research Analyst
(Swarnendu.Bhushan@MotilalOswal.com); +91 22 6129 1529
Sarfraz Bhimani - Research Analyst
(Sarfraz.Bhimani@MotilalOswal.com); +91 22 6129 1566
Investors are advised to refer through important disclosures made at the last page of the Research Report.
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