Gujarat Gas: Reiterate ‘buy’ with TP of Rs 560

Gujarat Gas (GUJGA) has proved to be a clear outperformer since the curbing of polluting fuels at Morbi – an impetus by the government toward the adoption of greener fuel. Since our upgrade in Dec’19, the stock is up 116% – it has outperformed the Nifty by ~95% – despite which the stock trades at 21x FY23E EPS currently. Interestingly, we have upgraded our EPS every quarter since then (from Rs 12.3 to Rs 19.9 for FY22E) on the back of better-than-expected volume growth. CGDs have been a true consumption story and, as highlighted in Exhibit 1, the market has always valued volume growth for these names. GUJGA has clocked volume growth of ~8% QoQ each time since 1QFY20 – despite the COVID-led disruption witnessed in 1HFY21. Over the past five years, the company has posted a volume CAGR of ~11%; we build in the same volume growth over the next two years as well.

The Ceramic Association of Morbi expects growth of 25–30% in FY22 (v/s ~15% in FY21) as 60 more industrial units are likely to be commissioned over Oct–Dec’21 and the current units would undergo further expansions. Also, we have been highlighting that any further pollution control measure or impetus on growing gas consumption in India hereafter would benefit GUJGA significantly (v/s the other two incumbents).

GUJGA would be the biggest beneficiary of any directive on Green Tax announced by MoRHT (refer to our report) – as Gujarat has no government directive on the use of CNG yet. Factoring in all of the above, the stock demands an upgrade, thus closing the gap v/s IGL (same volume growth potential of 10–12% over the medium term) – we value the stock at 24x (from 22x earlier) to arrive at target price of Rs 560/share. Reiterate Buy, with the possibility of further earnings upgrades going forward.