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Why Gujarat Gas Is Likely To Outperform Peers In Next Two Years

Gujarat Gas is expected to report its highest volume growth in next two years, aided by higher demand from Morbi’s tile industry.

Gujarat Gas is India’s largest city gas distributor. (Photographer: Sanjit Das/Bloomberg)
Gujarat Gas is India’s largest city gas distributor. (Photographer: Sanjit Das/Bloomberg)

Gujarat Gas Ltd. is expected be the best performer among peers in the next two financial years even as it lagged in the previous quarter.

India’s largest city gas distributor is expected to report its highest volume growth during the period, aided by higher demand from ceramic tilemakers in Morbi, Gujarat, according to estimates of at least 10 brokerages compiled by BloombergQuint. That would eventually help the company’s earnings per share to rise the most.

Tilemakers in Morbi—India’s largest ceramic manufacturing hub—moved to liquified natural gas after the National Green Tribunal ordered a shutdown of coal-based units. That helped boost volumes for Gujarat Gas. Following the order, the company has seen volumes at 8.5 million metric standard cubic meter per day, 31 percent higher than the average of the previous financial year.

The company is expected to achieve healthy growth rates in existing and new geographic areas, said Nitin Tiwari, vice president at Antique Stock Broking. High-volume growth would result in strong cash flows, helping Gujarat Gas pare debt and interest costs, he said. That would aid its earnings.

Analysts remain bullish. Of the 27 estimates tracked by Bloomberg, 70.4 percent recommend ‘Buy’, 18.5 percent suggest ‘Hold’, and the rest have rated it ‘Sell’. Still, the 12-month average target stock price implies an upside of just 1.5 percent from May 29 close.

Shares of the company trade at a discount to its nearest peer—Indraprastha Gas Ltd. That’s because of volatility in its margin and inconsistency in volume trajectory.

Gujarat Gas, which derives over two-thirds of its revenue from industrial sales, has seen a volatile growth in volumes and unit margin (Ebitda per standard cubic metre). That’s because gas distributors can only supply imported fuel for industrial use. And prices are linked to the global market and are prone to fluctuations.

By comparison, locally produced gas is used as cooking and auto fuels. Its prices are stable as these are regulated and change only twice a year. Moreover, liquefied natural gas also competes with cheaper alternatives such as coal, coking coal and petcoke for industrial use.

Fourth Quarter

Indraprastha Gas’ volumes rose 17 percent, a multiple-quarter high, in the three months ended March 31. But it was the only city gas distributor to report a decline in unit margin because a greater share of industrial volumes and higher costs.

Volume growth of Mahanagar Gas Ltd. slowed as compressed natural gas consumption fell because of a strike by Brihanmumbai Electric Supply and Transport buses. Its unit margin, however, continue to grow on the back of pricing power.

Gujarat Gas reported lower volumes because of tepid industrial demand. Its unit margin, however, expanded due to price hikes and lower raw material prices.

(Analyst estimates are compiled from reports by Kotak Securities, Motilal Oswal, Centrum Broking, HDFC Securities, Nomura and others)