18 February 2021
Update | Sector: Oil & Gas
TP: INR560 (+17%)
The Green Wave – upgrading the multiple
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
Free float (%)
329.6 / 4.2
527 / 191
Financials Snapshot (INR b)
FY21E FY22E FY23E
96.6 141.6 163.8
EPS Gr. (%)
Div. Yield (%)
FCF Yield (%)
Shareholding pattern (%)
Dec-20 Sep-20 Dec-19
FII Includes depository receipts
Stock Performance (1-year)
Sensex - Rebased
Gujarat Gas (GUJGA) has proved to be a clear outperformer since the curbing of
polluting fuels at Morbi – an impetus by the government toward the adoption of
Since our upgrade in Dec’19, the stock is up 116% – it has outperformed the Nifty by
~95% – despite which the stock trades at 21x FY23E EPS currently.
Interestingly, we have upgraded our EPS every quarter since then (from INR12.3 to
INR19.9 for FY22E) on the back of better-than-expected volume growth.
CGDs have been a true consumption story and, as highlighted in Exhibit 1, the market
has always valued volume growth for these names. GUJGA has clocked volume
growth of ~8% QoQ each time since 1QFY20 – despite the COVID-led disruption
witnessed in 1HFY21. Over the past five years, the company has posted a volume
CAGR of ~11%; we build in the same volume growth over the next two years as well.
The Ceramic Association of Morbi expects growth of 25–30% in FY22 (v/s ~15% in
FY21) as 60 more industrial units are likely to be commissioned over Oct–Dec’21 and
the current units would undergo further expansions.
Also, we have been highlighting that any further pollution control measure or
impetus on growing gas consumption in India hereafter would benefit GUJGA
significantly (v/s the other two incumbents).
GUJGA would be the biggest beneficiary of any directive on Green Tax announced
by MoRHT (refer
to our report)
– as Gujarat has no government directive on the
use of CNG yet.
Once gas is included under GST, GUJGA would benefit from increased volume
offtake, as industrial consumers would be able to take input tax credits, thus
lowering their gas feedstock cost. GUJGA would be able to take tax credit on
opex and capex as well.
Factoring in all of the above, the stock demands an upgrade, thus closing the gap v/s
IGL (same volume growth potential of 10–12% over the medium term) – we value the
stock at 24x (from 22x earlier) to arrive at Target Price of INR560/share. Reiterate
Buy, with the possibility of further earnings upgrades going forward.
Green Tax – Industries to be the biggest beneficiary
Basic tenets remain the same
Feb, PM Modi stated that the government was committed to bringing
natural gas under the GST regime (article). We have discussed the topic in
detail in our report, ‘Inclusion
of natural gas in GST would be positive’.
Since 2014, the focus on gas has been increasing to tackle pollution in the
country – via increased CNG/PNG penetration and higher offtake from
industries (in line with an increase in the gas mix to 15% v/s 6–7% currently).
The implementation of GST would also reduce the various anomalies that
currently prevail, such as different states charging a different VAT on CNG. For
example, Delhi charges nil, Maharashtra charges 13.5%, and Gujarat charges
Our study suggests an 18% GST rate could marginally benefit CNG.
may be marginally negative for PNG-domestic. It would also benefit industrial
consumers the most.
Swarnendu Bhushan- Research Analyst
Sarfraz Bhimani - Research Analyst
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.