According to Jefferies, with Morbi looking to invest 50 per cent in propane/LPG capacity and LNG prices firming up, it sees a structural drag on Gujarat Gas' pricing power, margin outlook and volume growth over the medium term.
Gujarat Gas was down over 3 per cent in morning trade on January 13, after Jefferies downgraded the stock from buy to "underperform" and cut the target price to Rs 400 per share from Rs 570, which outperforms the current market. There is a decline of more than 12 percent. worth.
With the Morbi plant investing around 50 per cent in propane/LPG capacity and spot LNG prices firming up, the global research and broking firm sees Gujarat Gas' pricing power, margin outlook and a structural drag on volume growth over the medium term.
"We have cut volume estimates for FY24-25E by 17 per cent/15 per cent and FY24/25E EBITDA by 15 per cent due to lower volumes and compression in margins. We expect the stock to grow on FY22-25E Will deliver 5 per cent EPS CAGR, brokerage firm said on valuations 22x forward PE is not a sufficient factor to account for earnings dilution in our view.
Gujarat Gas has reduced the price in Morbi by Rs 11.5 per cubic meter (scm) to Rs 46.5 per cubic meter from October. Indian Oil Corporation has in response reduced the price of propane to Rs 46.1 in Morbi, while IOCL's price is about Rs 3 less than the current price of Gujarat gas.
At 10.16 am, Gujarat Gas was trading at Rs 450.90, down by Rs 15.90 or 3.41 per cent, on the BSE.
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Jefferies believes that propane prices are likely to remain weak in the first half of calendar year '23 due to weak demand for downstream propylene and polypropylene. Global LNG supplies are tight from 2023-24 and once it opens up, LNG demand from China will increase. These factors may keep LNG higher relative to historical levels in FY24-25E. This could result in switching to propane in higher volumes 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 tilted towards industrial PNG, which accounts for about 70 per cent of its volume.
GSPL is the promoter of Gujarat Gas, which holds about 44 per cent stake, while the Government of Gujarat also directly holds 6 per cent stake in the company.
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