MOSL: GUJARAT GAS (Sell)-Continued volatility in volumes and margin

​GUJARAT GAS: Continued volatility in volumes and margin; Maintain Sell

(GUJGA IN, Mkt Cap USD1.9b, CMP INR907, TP INR712, 22% Downside, Sell)

• We had highlighted in our initiating coverage report on Gujarat Gas (GUJGA) – “Long road ahead,” released in April 2017 – that the company’s high exposure to the industrial segment has been resulting in high volatility in volumes and margins.
  
• Non-inclusion of gas under the Goods & Services Tax (GST) framework has led to a decline in gas sales, especially at Morbi. However, a reduction in VAT from 15% to 6% has led to normalization of sales volumes.
  
• The company raised CNG price by INR3.25/kg (inclusive of VAT and excise) to compensate for the increased domestic gas prices and also due to its inability to pass on GST-related costs.
  
• We expect the company to face short-term headwinds, as spot LNG prices have shot up more than 35% over the past four weeks.
  

Reduction in VAT provides some relief

• In our July 2017 report, we had highlighted how sales volumes at Morbi had declined ~17% to 2.2mmscmd due to non-inclusion of gas under GST.
  
• Since then, VAT has been reduced from 15% to 6%, providing some relief to consumers. Our channel checks suggest that sales volumes at Morbi have now increased to ~2.6mmscmd. However, closure of a few units due to heavy rains could result in lower volumes in 2QFY18 on a QoQ basis.