Gujarat Gas Shares Hit A Record High As Nomura Stays Bullish, Ups Price Target
Nomura hiked target price on Gujarat Gas to Rs 800 from Rs 475, implying a potential upside of 32.5%.
Shares of Gujarat Gas Ltd. jumped to a record high after Nomura listed the city gas distributor as its top pick among peers, citing strong FY21 performance, improved pricing power on higher volumes and better margin.
Gujarat Gas’ FY21 performance was “noteworthy”, the research firm said in a note, as it hiked target price on the stock to Rs 800 from Rs 475, implying a potential upside of 32.5% and maintained its ‘buy’ rating. “Due to strict lockdowns, its Q1 volumes had declined 55-58%. Yet, even as the Covid-19 pandemic persisted, Gujarat Gas saw a sharp recovery with record volumes in Q3/Q4, leading to year-on-year flat volumes for FY21.”
While the second wave of Covid-19 infections was more intense, lockdowns were less strict. And due to Gujarat Gas’ higher industrial share, its volume revival was the sharpest in FY21 among peers, Nomura said. “We expect a similar trend in FY22.”
Besides, Gujarat Gas’ margin expansion in FY21 was a reflection of its stronger pricing power, the research firm said. “In our earlier report, we noted that city gas distributors are effectively monopolies with strong pricing power. FY21 reinforces our belief as Gujarat Gas’ unit gas costs fell nearly 15% but its price cuts were modest. It reported record gross margin of Rs 8.4 per standard cubic meter, a 19% year-on-year rise; and Ebitda margin of Rs 6.1 per standard cubic metre, a 29% jump over the year earlier.”
Improving Outlook
Nomura, in its January report, had indicated that the National Green Tribunal’s order to curb pollution in Morbi, a hub for ceramic production, has changed fortunes for Gujarat Gas.
That, it said, is evident as:
The NGT’s order has resulted in nearly a threefold jump in average gas consumption in Morbi area. Morbi now accounts for more than 60% of Gujarat Gas’ total volumes, and 75% of its industrial/commercial volumes (excluding CNG and domestic gas).
Nearly all incremental gas to meet the higher demand was sourced from spot LNG markets.
As spot LNG prices were relatively softer in 2019 and 2020, Gujarat Gas’ average gas cost also declined. Lower gas prices resulted in robust volume growth in industrial demand in areas outside Morbi as well.
Nomura raised its earnings per share forecast for Gujarat Gas by 35% and 42%, respectively, for FY22 and FY23. “We expect a 26% EPS CAGR over FY21-23F.”
Downside Risks
Key risks, according to Nomura, include:
A sharp increase in spot/long-term LNG prices
The company’s inability to increase industrial/commercial PNG prices
Lower-than-expected pickup in CNG/PNG volumes and lower Ebitda margin.
If there is a cut in lower-priced domestic gas allocation to city gas distributors and/or the regulator decides low tariffs for open access to third-party marketers.
Shares of Gujarat Gas rose as much as 8.61%, the most since March 1, to trade at Rs 653.40 apiece before paring gains. Of the 32 analysts tracking the company, 23 have a ‘buy’ rating, six suggest a ‘hold’ and three recommend a ‘sell’, according to Bloomberg data. The average of 12-month consensus price targets implies a downside of 10.7%.