Margin outlook is still decent for Gujarat Gas

Margin outlook is still decent for Gujarat Gas

The stock of Gujarat Gas Ltd, which benefited from low gas prices in early 2021 amid a strong demand environment, has gained nearly 67% so far this calendar year. This is despite the company’s shares being down about 20% from the highs seen in August as worries about near-term volumes and margins seem to have weighed on investor sentiment.

Over the past few months, rising gas prices have forced utilities such as Gujarat Gas to continue to raise prices. This has led to softness in gas offtake by the industrial sector, which has affected Gujarat Gas more than its peers as it has a higher exposure to industrial sales.

Domestic gas prices were raised effective 1 October by 62% to $2.9/million metric British thermal units (mmBtu). As a result, Gujarat Gas, which has exposure to both imported liquefied natural gas and spot gas sourcing for distribution, has had to be more proactive in passing on rising costs.

Recent channel checks by Jefferies India Pvt. Ltd at the Morbi ceramic cluster in Gujarat show that current gas consumption is 75% of what it was before the second covid wave. Morbi channel checks suggest volumes at about 6.5-7/5.7 million metric standard cubic metre per day (mmscmd) of gas in November/ December, the brokerage said. In March 2021, Morbi gas volumes were higher at 7.7-7.8 mmscmd.

However, volumes remain pretty much range-bound and, to that extent, it helps the company mitigate exposure to high spot LNG prices. Indeed, the price hikes show that the company enjoys strong pricing power. What this also means is that lower exposure to spot gas along with higher pricing may help Gujarat Gas maintain its margins profile.

What’s more, a recent conversation between Jefferies India’s analysts and the management of Gujarat Gas indicates that underlying demand could be strong at about 8 mmscmd. As such, volume growth outlook appears robust, given that 75% of the 50-60 plants in the Morbi cluster, which were expected to come online, have already been commissioned, point out analysts.

Meanwhile, Gujarat Gas has been expanding its compressed natural gas and piped natural gas network. Gas, a much cheaper and cleaner alternative to other fuels, may continue to see good demand from automobile and other non-industrial users. The geographical expansions add to the volume outlook. Analysts at HDFC Securities Ltd expect volume growth to be 16% over FY21-23 for Gujarat Gas.

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