Gujarat Gas: A Key Risk Is Also A Long-Term Strength, Say Analysts

Gujarat Gas Ltd. stands out among peers as the bulk of its demand comes from one industry. There lies its strength. And a potential risk too. But analysts aren’t concerned.

While the city gas distributor dominates Gujarat, ceramic firms in the western Indian state’s Morbi region are among the biggest consumers of its fuel. Chemical and agrochemical makers follow. All three are growing industries.

The consumption at factories, however, is prone to fluctuations depending on the price of fuels like propane or liquefied petroleum gas. Like now, when prices of gas have been surging on sudden explosion of demand, making companies consider the alternatives.

India increased administered gas prices by 62% in October. Brokerages, including HDFC Securities, Emkay Global and ICICI Direct, expect a further increase in April as the prices are benchmarked to international trends. Short-term spot LNG prices have surged 92.8% in the last one year amid supply-side disruptions, low inventory levels, growing demand and costlier crude oil.

Price Pressure

Gujarat Gas has to procure fuel at administered prices for its piped kitchen gas and CNG users, which account for less than a quarter of its sales volumes.

And it has to source regassified fuel at an even higher price from the spot market for its commercial and industrial users. This category accounted for more than 78% of sales volumes in FY21.

Spot LNG, according to a Reliance Securities report, accounted for more than a third of its sourcing in the quarter ended September.

Higher costs prompted the company to increase prices across user categories.

Since the hike in administered prices in October, Gujarat Gas, like its peers, increased CNG prices by nearly 20%.

Gujarat Gas raised its PNG industrial prices by 70% since August to Rs 57-58.8 for every standard cubic metre, according to Jefferies’ Dec. 20 report.

Gas contributes about a third of tilemakers’ costs. Rising spot LNG prices are forcing ceramic players to look for alternative fuels like propane, according to Antique Stock Broking. “The installation of propane facility appears attractive in the current price environment offering a payback of 4-5 months.”

According to Prabhudas Lilladher’s Jan 10. note, propane is 8% cheaper than gas.

BloombergQuint awaits Gujarat Gas’ response to emailed queries.

Analysts, however, see that as a short-term concern.

Fuel switching to cheaper substitutes like oil and coal, and increase in supplies and storage of gas could eventually restore normalcy in global LNG prices, Nirmal Bang said in a report. The brokerage also expects an intervention by the government to mitigate the impact of higher administered prices.

Analysts at Jefferies, too, don’t expect high gas costs as a long-term concern due to the company's strong pricing power. “Despite the current spike in spot LNG costs, the sharp price hikes taken by Gujarat Gas are likely to improve its margin outlook,” Jefferies said.

Gas demand at Morbi stands at 8-8.5 mmscmd. Even after a 25-30% price hike by ceramic producers, Jefferies said there’s no significant decline in interest for Indian tiles as costs have risen globally.

According to a Prabhudas Lilladher report, any resolution in Ukraine crisis and forward movement in certification of the Nord Stream 2 pipeline will ease spot LNG prices and support margins for Gujarat Gas.

Morbi Momentum

India's push for cleaner fuels will benefit Gujarat Gas along with its peers. Prime Minister Narendra Modi, who announced a net-zero emissions target by 2070, wants to raise the share of gas in the energy mix, besides pushing renewable power, to curb pollution in the country, home to some of the world's worst polluted cities.

For Gujarat Gas, there’s an added incentive.

Demand from the industrial segment jumped the most between FY17 and FY21 for the company, partly aided by the National Green Tribunal’s March 2019 order that banned coal gasifiers in the Morbi ceramic manufacturing cluster, CARE Ratings Ltd. said in a report.

The Morbi region accounts for more than 80-90% of the tiles made in India and over half of Gujarat Gas' sales, Antique Stock Broking said in another report. The cluster is expected to double its output in the next five to seven years because of increased export opportunities, it said.

The ability to develop better designs in every export container compared to Chinese peers provides an advantage to Morbi players, it said in a report. “Indian players have capitalised on the Chinese government's crackdown on the ceramic industry.”

Domestic residential demand for tiles will also rise, driven by home improvements and work-from-home trends, according to a Prabhudas Lilladher report. Gujarat Gas expects India’s per capita ceramic usage to rise from 0.6 square metres to 1 sq mt by FY25 and FY26, it said.

In FY21, the company sold 9.4 million metric standard cubic metres of gas every day. Nirmal Bang and Prabhudas Lilladher expect that to grow 15% on an annualised basis between FY22 and FY24 to 15.2 mmscmd.

Expanding Network

Gujarat Gas supplies fuel in 43 districts in six states and one union territory, Dadra and Nagar Haveli, with a total network spanning over 30,700 kilometres.

According to its FY21 annual report, it added more than 1 lakh residential customers and commissioned 150 new CNG stations in the last financial year. It operates 564 CNG stations.

The company on an average spent Rs 582 crore on network expansion in the years through March 2021, according to its investor presentation.

In the next three years, it plans to invest Rs 2,800 crore for developing city gas distribution in new and existing areas of operations, according to CARE Ratings’ September report. The company won seven new areas to supply gas in the ninth and tenth rounds of auction by Petroleum and Natural Gas Regulatory Board.

Financials

Gujarat Gas scores better than peers in terms of trailing twelve months Ebitda growth, profit growth and return ratios. It has improved its gearing, or debt-to-equity ratio, from 0.6 times in FY20 to 0.2 times in FY21.

Analysts’ Estimates

Out of the 31 analysts tracking Gujarat Gas, 20 have a ‘buy’ rating, while six suggest ‘hold’ and five recommend ‘sell’. The stock has surpassed analyst target prices, and the average of 12-month price targets implies a downside of 0.5%.

Gujarat Gas has seen the biggest upgrades for FY22E and FY23E earnings among peers in the last one year, according to Bloomberg data.

Short-Term Risks

Seasonally weak domestic demand for tiles amid reduced construction activity in northern India during winters.
Non-availability of containers hurting exports.
Higher freight rates brought down exports to an average of 32 million square metres a month from more than 45 million sqm in the first half of FY22, Antique Stock Broking said.