Nomura suggests that Gujarat Gas Ltd.’s current stock price already factors in the anticipated near-term volume gains from the industrial PNG price reduction to the Morbi cluster. The brokerage firm believes that investors have a favorable opportunity to sell the stock at the current price. Nomura has reiterated its ‘reduce’ rating on the stock, with an unchanged target price of Rs 505 per share.
The company has implemented a significant price decrease of Rs 3.8 per standard cubic meter (8%) to Rs 41.7 per scm for industrial PNG supplies to the Morbi cluster, effective from March 1. This move aims to boost volumes, which have been weak since 2QFY23. Nomura anticipates a notable increase in volumes in the short term due to elevated propane prices in March-April 2024 and the quick switch from propane to natural gas for Morbi consumers. The brokerage notes that current propane prices are based on $630 per tonne, which is expected to remain stable at $621 per tonne in April, translating to propane prices of Rs 43 per scm.
However, as propane prices decrease in May, Nomura sees potential risks to volume recovery and limited benefits from Gujarat Gas Ltd.’s actions. The brokerage highlights challenges for the company in managing margins when propane prices decline due to seasonal trends. Nomura projects a decline of Rs 2.8 per scm in propane prices and a smaller decrease of Rs 1.5 per scm in input costs for the June quarter. Additionally, they anticipate a further decline of Rs 3.7 per scm in the second quarter, with prices gradually increasing by Re 1 per scm over 2HFY25.
If Gujarat Gas Ltd. fails to achieve significant volume recovery from the Morbi price adjustments and meet its target of 10% overall volume growth and unit Ebitda at Rs 5.5 per scm, Nomura expects to lower its EBITDA and EPS estimates for FY25F by 11% and 14%, respectively.
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