Gujarat Gas - Softness In LNG Prices Obscures Murky Long-Term Prospects: ICICI Securities

ICICI Securities Report

We downgrade Gujarat Gas Ltd. to Reduce, from 'Hold', as we turn increasingly worried about the company’s growth trajectory beyond FY25. The recent weakness in liquefied natural gas prices is a positive (assuming it is not passed through) and drives a material 6/19.1/15.3% upgrade in FY24E/25E/26E earning per share, but does not detract from structural worries.

Essentially:

1. Growth from areas ex-Morbi remains murky, with limited traction observed from the ~Rs 43 billion capex over FY19-23 and a further Rs 36 billion estimated over FY24-26E. (volume/Ebitda compound annual growth rate over the same period at 8/14%);

2. Margins remain volatile and dependent on propane price vagaries;

3. Gujarat Gas guidance on margins is cautious, topped with limited visibility on volume growth; and

4. The company’s valuation is still at >20 times FY26E EPS, leaving room for more downside risks.

Key upside risks:

1. Sharper recovery in liquified petroleum gas (propane) prices,

2. Faster execution of expansion plans in new areas,

3. Sharp drop in LNG prices.

Key downside risks:

1. Longer sustained weakness in propane prices,

2. Slower ramp up of volumes from new areas,

3. Sudden spike in spot LNG prices.

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