Gujarat Gas Share Price Accounts For Volume Gains On Lower Costs, Says Nomura

Gujarat Gas Ltd.'s current stock price already accounts for the near-term volume gains that it expects from the industrial PNG price cut to the Morbi cluster, according to Nomura.

"We, therefore, believe that the current stock price offers investors a good opportunity to exit the stock," the brokerage firm said. It has maintained a 'reduce' rating on the stock, with the target price unchanged at Rs 505 apiece.

The company announced a significant price cut of Rs 3.8 per standard cubic metre (8%) to Rs 41.7 per scm for industrial PNG supplies to the Morbi cluster effective March 1, in a bid to shore up volumes that have remained weak since 2QFY23.

"We expect the move to drive a healthy uptick in volumes for the short term, given propane prices remaining elevated over March-April 2024 and the short switchover time from propane to natural gas for Morbi consumers," Nomura said.

"Current underlying propane prices of Rs 44 per scm are based on $630 per tonne, and prices will remain broadly range-bound for April as well at $621 per tonne, implying propane prices of Rs 43 per scm," it said.

However, as underlying propane prices decline from May, the brokerage sees risks to the volume recovery and expects limited benefits from GGL’s move. "The room for incremental price cuts now appears low, given futures prices for propane and GGL’s input gas cost based on spot/implied term LNG futures prices," it said.

The brokerage noted that given the decline in spot LNG prices, the company was able to drive a significant benefit in its gas sourcing costs for 4QFY24. "However, now that most of it is passed on, GGL is likely to face challenges in managing margins when propane prices decline on account of seasonal trends," Nomura said.

Nomura expects propane prices to decline by Rs 2.8 per scm, while input costs are expected to decline only by Rs 1.5 per scm in the June quarter. In the second quarter, they expect a further decline of Rs 3.7 scm, while prices inch up more modestly by Re 1 per scm over 2HFY25.

The brokerage said if the company is unable to drive a significant volume recovery from the Morbi price cuts and actually deliver as per management's guidance of 10% overall volume growth and unit Ebitda at the higher end of Rs 5.5 per scm, then "it will drive a cut in our Ebitda and EPS estimates for FY25F by 11% and 14%, respectively," Nomura said.