Here's why analysts are bullish on Gujarat Gas despite a 75% dip in Q1 PAT

Analysts at Motilal Oswal Financial Services, however, remain positive on the stock on better-than-expected performance.
Shares of Gujarat Gas skid up to 3.8 per cent to Rs 297.75 on the BSE on Wednesday after the company's June quarter profit tumbled 75 per cent to Rs 59 crore, compared to Rs 234 crore-profit logged in the year-ago quarter.

At close, the stock pared its losses and was down just 0.58 per cent at Rs 308 apiece, as against 25 points, or 0.07 per cent, decline in the S&P BSE Sensex. 

The oil and gas firm posted a consolidated net profit of Rs 59.07 crore, down 74.76 per cent YoY. The net profit margin in Q1FY21, meanwhile, came in at 5.33 per cent, reporting a de-growth of 3.43 per cent YoY. The net profit margin for Q1FY20 was at 8.76 per cent.

That apart, consolidated net revenue in Q1FY21 stood at Rs 1,107.36 crore, declining 58.54 per cent on a yearly basis from Rs 2,670.82 crore clocked in Q1FY20. It's EBITDA (earnings before interest, tax, depreciation and amortisation) stood at Rs 185.74 crore in Q1FY21, down 60.35 per cent YoY. For Q1FY20, it had posted EBITDA of Rs 468.49 crore. EBITDA margin deteriorated to 16.77 per cent, down 77bps YoY.

Analysts at Motilal Oswal Financial Services, however, remain positive on the stock on better-than-expected performance.

"Gujarat Gas reported better-than-expected margin of Rs 4.9/scm (higher QoQ as well), while volumes were in line with estimates, leading to EBITDA of Rs 186 crore... Despite lockdown, Gujarat Gas was able to add 13 new CNG stations during the quarter and plans to add ~60 new CNG stations this year (of the total 100 planned outlets – which should further grow the reach of CNG in Gujarat and encourage conversions)," they said in a post-result update note. 

They added: Gujarat Gas has a total LT contract of ~3.2mmscmd, of which British Gas accounts for ~2.2mmscmd (the contract is set to expire in 2024). The company believes British Gas volumes could be reduced to ~2mmscmd, but not any lower. That said, the CGD business needs LT volumes in terms of operating stability. The company has the lowest margins among peers; thus, it is not lucrative for third-party competitors. GUJGA has been passing on the benefits in sourcing cost to its customers. The current discount at Morbi is Rs 3.8/scm, on selling price of Rs 30/scm for non-Morbi players.

Those at Sharekhan, meanwhile, believe that Gujarat Gas’s long term volume growth outlook remains robust as structural gas demand drivers like ban on polluting fuels and low spot LNG prices ($2-3/mmBtu) are well-placed and would lead to robust gas consumption growth in India.

"Moreover, EBITDA margins are also expected to expand given low gas cost tailwinds. Hence, we expect earnings CAGR of 9 per cent over FY2020-FY2022E along with a robust RoE of 24 per cent. Furthermore, development of seven new geographical areas (GAs) and crackdown down of polluting industrial areas in Gujarat would lead to the next leg of volume growth for the company. We expect Gujarat Gas to generate robust free cash flow (FCF) of ~Rs. 2,609 crore over FY2021E- FY2023E, which would make the company cash positive from net debt of Rs 1,140 crore in FY2020. Hence, we stay Positive on GGAS and expect an 18-20 per cent upside despite a recent sharp run-up of 51 per cent from the recent low of Rs. 205 in March 2020. At CMP, the stock is trading at 19.8x FY2022E EPS," they said.

The company, analysts at JM Financial say, highlighted that current volumes have recovered to pre-Covid levels on a sharp rebound in industrial segment volumes. "We are positively surprised by the sharp volume recovery and hence raise our FY21-22 volume estimates and consequently, increase margins due to positive operating leverage. Our FY21/FY22 EBITDA has risen by 7 per cent/4 per cent and our revised DCF-based target price stands at Rs 360/share (from Rs 330/share)," they said in a result update. They maintain BUY on expectation that Gujarat Gas would register robust volume growth led by a sharp rise in gas use by industrial consumers due to the NGT’s 6Mar’19 order banning the use of coal-based gasifiers in Morbi; and a strengthening margin profile due to improved competitiveness of gas led by relatively weak domestic gas and spot LNG prices. 

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