Gujarat Gas Focus On Ceramic Makers May Impact Margins, Says Nomura
The brokerage estimates negative margins in the range of Rs 0.8 to Rs 1.4 per standard cubic metre on Gujarat Gas' Morbi volumes over Q2-Q4 FY25.
The aggressive customer-centric campaign by Gujarat Gas Ltd. targeting ceramic makers in Morbi and Surendranagar areas could impact margins negatively mainly due to the gas distribution company's plan to have a price parity with propane, according to Nomura. Propane is used as an alternative to natural gas by ceramic makers.
With the aim of increasing its industrial volumes from ceramic customers in the Morbi and Surendranagar areas, the company invited expressions of interest from customers to purchase natural gas, in March 2024. The goal was to increase volumes from these areas by more than 40%.
Gujarat Gas management disclosed in its FY24 earnings call that they will cap the natural gas prices offered in these regions based on propane prices.
Volumes
Customers were required to state the quantity of natural gas that they wish to off-take for the specified time period, according to the EoI.
The company supplies roughly over 4 million metric standard cubic metres of natural gas per day to ceramic customers in the Morbi and Surendranagar areas and expects to add another 3 million metric cubic metres of natural gas volumes via this strategy.
Response To EoI
In its earnings call, management indicated that the company received a good response for the EoI and that the execution of agreements with customers is currently under process.
The management also revealed some key EoI highlights:
Natural gas prices offered to customers will have a ceiling price comparable with propane prices in the Morbi market.
The company will modify its gas sourcing to secure gas at competitive prices to protect margins.
Contracts will be for a period of one year.
Around 150 EoIs are expected to be finalised by May–June 2024.
Nomura's Take
According to Nomura, the EoI for ceramic customers will enable volume recovery in the area, but it will negatively impact the company's margins.
This is primarily due to Gujarat Gas' plan to have a price parity with propane.
Impact On Margins
Price parity of the natural gas prices to the propane price could potentially lead to Gujarat Gas having negative gross margins, the brokerage said.
It estimates negative margins in the range of Rs 0.8 to Rs 1.4 per standard cubic metre on its Morbi volumes over Q2-Q4 FY25.
