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India's Largest CGD Company Hit 52-Week Low, Brokerage Suggest Buy For Robust 60% Gains

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Motilal Oswal Financial Services, a leading brokerage firm, in its report published on June 22, 2022, has given a buy rating to Gujarat Gas Ltd, a mid-cap oil & Gas sector company. The brokerage has to give a buy call for a target price of Rs 650/share. Gujarat Gas Ltd is India's largest CGD Company.

 

CMP, Target Price, & Potential Gains

CMP, Target Price, & Potential Gains

Gujarat Gas Ltd's Current Market Price (CMP) is Rs 410.10 at the time of writing. It was opened at Rs 412.25, while the previous close was 409.05. The stock hit the 52-week low recently. The CMP is nearly Rs 6.55 above the 52-week low of Rs 403.55/share recorded yesterday June 23, 2022. The 52-week high of the stock is Rs 786/share recorded on 94 August 2021.

As per the CMP of Gujrat Gas and the Motilal Oswal's estimated Target price of Rs 650/share, the stock could jump nearly 60% in 12 months.

Stock Details 
CMPRs 410.10
Target PriceRs 650
52 Week LowRs 403.55
52 Week HighRs 786
Potential Returns60.00%
1 Year Returns-37.55%
5 Year Returns168.97%
Market CapRs 28,158.60 Crore
Spot LNG prices create havoc
 

Spot LNG prices create havoc

Russia is the second-largest producer of natural gas, accounting for ~26% of global gas trade via pipeline as well as ~8% of global LNG trade. The ongoing Russia-Ukraine crisis has driven up LNG prices to USD34/mmBtu from its USD19/mmBtu in CY21. Gujarat Gas has offered reduced prices to the district of Morbi until Aug'22. However, prices are still higher at INR58/scm compared with its INR27/scm from about two years ago. In order to hedge against the rise in prices, the company has gotten into a forward contract to buy a large part of its spot requirement till early CY23 at much lower prices.

LNG penetration increases in Morbi, but only a risk during summer

LNG penetration increases in Morbi, but only a risk during summer

There are ~700 ceramic units at Morbi, while another 15-20 units are coming up at Aniyari. Out of these, ~160 units are currently undergoing LPG installations, while another 70-80 units are in their various phases of construction. While total gas demand (LNG/LPG) in Morbi is 8-8.5mmscmd, consumption at its peak stands at ~7.5mmscmd as witnessed in 4QFY21, since some of the ceramic units are under maintenance. The demand peak is expected to reach 9- 9.5mmscmd in another 1-1.5 years. With the fixed unit cost of LPG installation at Rs 7-10m, it does not look economical for smaller units consuming less than 2,500-3,000scmd. While the current LPG consumption stands at ~1-1.2mmscmd, we expect the total LPG capacity to rise to ~2mmscmd by CY22-end. However, barring the current flux in LNG markets, we expect LNG prices to remain cheaper than LPG, except during the summers.

Other demand avenues remain strong

Other demand avenues remain strong

The brokerage in the report stated, "We expect Ahmedabad rural to have a peak demand of 1-1.5mmscmd in 1-2 years. The recently acquired Amritsar and Bhatinda from Gujarat Gas would aid both CNG as well as industrial volumes for the company, and we expect its peak potential to be around 0.5-0.8mmscmd. Other areas for growth are Jhagadia Phase-II, Dahej, Silvassa, and Thane rural. After a long time, Gujarat Gas has started adding 100-150 CNG outlets each year. The wider spread of CNG outlets is likely to boost CNG volumes, which already reflects in the company's quarterly sales performance. CNG volume is expected to grow at 15-20% annually. There are five industrial clusters in Gujarat classified as critically/severely polluted with respect to air pollution. Over the long term, with the enforcement of stricter emission control measures by the authorities, we can expect an overall rise in demand for Gujarat Gas."

Buy for a Target Price of Rs 650/share

Buy for a Target Price of Rs 650/share

Domestic gas availability is expected to rise by ~12mmscmd (RIL) and 10mmscmd (ONGC) over the next few months. Even at a 12% slope of Brent, it would be half of the current tied-up spot LNG prices. At current consumption of 10.5mmscmd, Gujarat Gas is expected to have ~1.7mmscmd of spot LNG in its sourcing. If it replaces the whole spot LNG by domestic gas at 12% slope, the sourcing cost for total industrial sales would be reduced by ~Rs 8/scm. While increased LPG installations would affect LNG consumption, especially during the summer season, overall, we do not expect it to be a threat to LNG penetration in the state.

The brokerage said, "We estimate 11.8/13.5mmscmd of total sales in FY23/24, up from 10.7mmscmd in FY22. Our EBITDA/scm estimate stands at Rs 5.5 for FY23/24, up from Rs 5.3 in FY22. We value the stock at 26x FY24E EPS and reiterate it as the top pick in the sector."

Motilal Oswal in the report has estimated a target price of Rs 650/share for a target period of 12 Months.

About - Gujarat Gas Ltd

About - Gujarat Gas Ltd

Gujarat Gas Limited is India's largest City Gas Distribution (CGD) Company in terms of sales volume, with 27 CGD licenses spread across 43 districts in 6 states and 1 Union territory in the states of Maharashtra, Gujarat, Rajasthan, Punjab, Haryana, and Madhya Pradesh and Union Territory of Dadra & Nagar Haveli.

Gujarat Gas Limited hold the leadership position in the CGD industry in terms of size and scale of operation, with more than 17 lakh households, over 13,600 commercial customers, 711 CNG stations, and more than 4,300 industrial units and over 32,890 kilometres of the natural gas pipeline network. The Company is currently flowing total gas volume above 10.5 mmscmd.
For the second consecutive year, the company received Business Today's Best CEO Award 2021, this time in the Emerging Companies category.
In 2020 the company received Business Today's Best CEO Award in the Oil & Gas category, Business Standard STAR PSU Award and has been recognised as an Honoured Company, ranked amongst the Top 3 for the Best Investor Relations Programme in the Energy Sector across Asia (ex-Japan and Mainland China) by Institutional Investor in the 2021 All-Asia Executive Team rankings.

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.

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