Gujarat Gas' Q3FY18 results (Outperformer) - Volumes strong, margins weak, driven by seasonal LNG spike

Q3FY18 result highlights

• Gujarat Gas (GGL) adjusted PAT of Rs600mn, up 42% yoy (IDFCe 864mn, consensus est 550-600mn). Miss vs IDFCe was driven by lower gross margins of Rs6/scm vs est of Rs7/scm even as volumes surprises positively at 6.3 mmscmd, up 18/10% yoy/qoq vs IDFCe of 6 mmscmd.
• The volume strength is a material positive, and has been driven by continued revival of demand from industrial/comm segment (+22% yoy) and steady growth in domestic/CNG demand (+9/11% yoy respectively). The industrial/comm volumes of 4.48 mmscmd is the highest volume from this segment since Q1FY16.
• Blended gas costs of Rs21.1/scm (US$8.8/mmbtu) were however higher than IDFCe Rs20.04/cm (US$8.3/mmbtu), driving the miss on margins andf hence profitability. EBITDA of Rs2bn (+17% yoy, IDFCe Rs2.4bn)

Key positives: yoy growth in volumes. Decline in interest (-10% yoy).

Key negatives: Miss vs estimates driven by lower margins due to greater than anticipated impact of higher LNG prices.

Impact on financials: We reduce FY18/19/20E EPS by 19/10/9% to factor lower margins, offset by higher volumes. TP revised to Rs1075/sh.

Valuations & View

Despite the disappointment vs estimates we remain positive on long term prospects of GGL over FY18-20E. With volume traction visible and the development of newer areas (5 new districts Kutch, Botad and Silvassa Dahej and Thane commissioning in last 6-9mths) we see a strong volume growth trajectory over FY18-20E. With the seasonal impact on LNG prices already winding down and the price hike of Rs2.5/scm taken in industrial segment in Dec, margins should recover sharply in Q4. With the steadily building strength being seen in volumes and the higher margins, we see earnings visibility improving materially for GGL. Our revised estimates imply a CAGR of 11/5/10% in volumes/gross margins and EBITDA/scm over FY17-20E. Additionally, the newer area volumes are expected to add an estimated 3.4mmscmd of volumes to existing business by FY22E, taking total volumes to ~11.5 mmscmd. Current valuations of 14x FY19E EPS and 7.4x EV/E (adjusting for the NPV of new areas) remain attractive, with our revised TP implying ~19% upside from here. Reiterate outperformer.