Gujarat Gas stock in focus after government raises import duty on propane

The propane prices for August expected to drop to $400 per tonne versus $450/tonne for July 2023. Propane is the biggest competing fuel for Gujarat Gas in the Morbi region.

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Gujarat Gas Ltd stock is in focus after the government raises the import duty on propane used for commercial purposes. The new import duty stands at 19.25%, a substantial increase compared to the previous rate of 2.75%.

This development is expected to result in a price hike of approximately Rs 5-6 per standard cubic meter (scm) for propane in Morbi region. Consequently, this increase in price will neutralise the cost advantage that propane previously enjoyed over Gujarat Gas.

This notification is a response to the ongoing decrease in international propane prices and a potential request from City Gas Distribution companies to address the current difference in taxation between natural gas and propane. Natural gas falls under the VAT regime, and many buyers are unable to claim input tax credit, while propane and butane fall under the GST regime, as explained by Antique Stock Broking.

Prior to the implementation of the import duty, propane was priced at around Rs 32-33/scm, while Gujarat Gas was priced at Rs38.6/scm.

The propane prices for August are expected to drop to $400 per tonne versus $450/tonne for July 2023. Propane is the biggest competing fuel for Gujarat Gas in the Morbi region.

According to analysts, the recent action taken by the government is considered a significant positive for Gujarat Gas. This move is expected to weaken the competitive position of propane, which had been capturing market share in Morbi.

“The action is a big positive for Gujarat Gas, undermining the competitiveness of propane which has taken away market share in Morbi,” highlighted Antique Stock Broking.

As a result, Gujarat Gas is likely to benefit from the increased import duty on propane, as it levels the playing field and potentially allows them to regain market share in the region.

Last week even Jefferies had pointed out that weakening propane price is helping Gujarat Gas defend its volumes. It pointed out that propane economics have been unfavourable in Q1 of FY24. In fact, the foreign brokerage firm sees a further cut in propane price in Morbi in Q2.

The financials

In Q4, Gujarat Gas reported a fall in net profit by 16 percent year on year to Rs 369 crore, compared to Rs 444 crore in the corresponding period last year.

Revenue from operations for the January-March quarter came in at Rs 4,073.82 crore, declining 14 percent YoY. However, sales volume increased 22 percent to 8.86 mmscmd. The 12-month consensus target on the stock is Rs 557.50. This represents an upside of 13 percent from the current level.