Gujarat Gas slides after Jefferies downgrades stock, cuts target price

According to Jefferies, with 50 percent of Morbi investing in propane/LPG capacity and outlook on spot LNG prices firm, it sees a structural drag on Gujarat Gas’s pricing power, margin outlook and volume growth in the medium term

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Gujarat Gas was down more than 3 percent in the morning trade on January 13 after Jefferies downgraded the stock to “underperform” from buy and cut the target price from Rs 570 to Rs 400 a share, a downside of over 12 percent from the current market price.

With around 50 percent of the Morbi plant investing in propane/LPG capacity and outlook on spot LNG prices firm, the global research and broking firm sees a structural drag on Gujarat Gas’s pricing power, margin outlook and volume growth in the medium term.

“We have cut volume estimates 17 percent/15 percent for FY24-25E and have cut FY24/25E EBITDA 15 percent due to lower volumes and compression in margins. We expect the stock to deliver 5 percent EPS CAGR over FY22-25E, valuation at 22x forward PE doesn’t adequately factor in the earnings slowdown in our view,” the brokerage firm said.

Gujarat Gas has lowered the price in Morbi by Rs 11.5 a standard cubic meter (scm) since October to Rs 46.5 an scm. Indian Oil Corporation has reduced propane price to Rs 46.1 in Morbi in response, while IOCL’s price works out to be around Rs 3 cheaper than Gujarat Gas’s current price.

At 10.16 am, Gujarat Gas was quoting at Rs 450.90, down Rs 15.90, or 3.41 percent, on BSE.

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Jefferies believes that propane prices could remain weak over H1 CY23 as downstream propylene and polypropylene demand is weak. Global LNG supplies are tight over 2023-24 and China’s LNG demand will rise as it opens up. These factors could keep LNG elevated relative to historical levels over FY24-25E. This could result in more volume switching to propane in the near-term, compounding the structural drag for Gujarat Gas.

Gujarat Gas is a city gas distribution company supplying compressed natural gas (CNG ) and piped natural gas (PNG) to both industrial and domestic customers in Gujarat and some areas outside the state. The volume mix of Gujarat Gas is skewed towards industrial PNG which comprises around 70 percent of its volumes.

GSPL is the promoter of Gujarat Gas owning around 44 percent stake, while the Gujarat government also directly owns a 6 percent stake in the company.

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