Gujarat Gas has clearly outperformed the peers with 13.8% volume CAGR over FY2016-FY2020 as compared to a 12.7% for IGL and 4.5% for MGL. Even post lockdown in Q1FY21, Gujarat Gas has shown very strong volume growth of 6%/23% yoy in Q2 FY21 / Q3FY21. Gujarat Gas volume growth to continue outpace its peers with our expectation of 22.4% volume CAGR over FY21-FY23 led by strong demand for industrial PNG from Morbi ceramic cluster and Chemical and Pharma belt in Gujarat. Management has guided for Morbi’s peak volume potential of 10mmscmd versus 6.5mmscmd currently and 8%-10% annual growth from pharma / chemical customers. Gujarat Gas share price closed at Rs 518.5 in ;ast session, down Rs 16 or 3%.

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Gujarat Gas volume growth pace would further gain momentum in case of potential NGT crackdown of polluting industrial areas in Gujarat (volume potential of 2mmscmd-2.5mmscmd) and ramp-up of volume from its 7 new GAs (which have already been commercialised with volume potential of 3mmscmd-3.5mmscmd). Potential inclusion of natural gas under GST regime would benefit GGAS most among in CGD players as gas demand from industrial customers would increase as customers would be able to avail benefit of input tax credits.

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Also, Gujarat Gas would be able to take tax credit on operating cost and its capital expenditure, which would boost its profitability. Industry leading volume growth outlook, high RoE of 30% and robust FCF generation of Rs 1400-1650 cr annually warrants upgrade of valuation multiple for Gujarat Gas. Sharekhan thus increase their price target to Rs 630 (valued at 24x FY2023E EPS) and retain Buy on Gujarat Gas given possibility of further earnings upgrade (regulatory push to increase penetration of greener fuels especially natural gas).

Gujarat Gas Key Risks:

Lower-than-expected gas sales volume in case of COVID-19 led economic slowdown. Delay in development of new GAs, sharp rise in LNG prices, and adverse regulatory changes could impact outlook and valuations.