Rising industrial demand to drive volume recovery for Gujarat Gas

The company derives about 72% of its sales volumes from the industrial segment

Rising demand for piped natural gas (PNG) from industrial users augurs well for Gujarat Gas. The company derives about 72 per cent of its sales volumes from the industrial segment as against 12 per cent for Indraprastha Gas (IGL) and 14 per cent for Mahanagar Gas (MGL) and hence is best placed to benefit from the higher growth of industrial volumes. Falling liquefied natural gas (LNG) prices globally will expedite the shift towards LNG from other coal-based fuels, believe analysts. Analysts at Elara Capital expect industrial PNG volumes could double to about 10 million metric standard cubic metre per day (mmscmd) by FY22 from 4.5 mmscmd in FY16 and aid prospects of all the above three city gas distribution companies.

Gujarat Gas has also witnessed rising volumes in Morbi - particularly from ceramic plants. In fact, the Morbi industrial segment has already added volumes of about 0.5 mmscmd to the 5.3 mmscmd volumes reported by Gujarat Gas in the latest December quarter. This has triggered a host of brokerages to raise their volume as well as revenue estimates for the company for FY18 by about 7 to 9 per cent in March. Factoring in the recent price hikes implemented by Gujarat Gas, analysts have also upped their earnings estimates for the company by 10 to 12 per cent.

In this backdrop, it is not surprising that the Gujarat Gas scrip has surged about 19 per cent in the past one month- racing ahead of peers IGL (down 3 per cent) and MGL (up 1.3 per cent). It made a new 52-week high of Rs 749.7 on Thursday. But, even after this run-up, the Gujarat Gas scrip has lagged these stocks in the past one year as industrial volumes have started improving very recently. IGL and MGL are plays on growing adoption of compressed natural gas (CNG) as an auto fuel and hence have had a strong run in the past one year.

Going forward, Gujarat Gas is also entering new geographies like Silvassa, Kutch (W), Botad, Dahej, Thane, Anand, amongst others. This will act as an additional growth driver for the company. Analysts believe each of these geographies can add volumes of at least 0.3 to 0.5 mmscmd going forward. In this backdrop, most analysts are positive on the company with some expecting returns of 15-17 per cent even from current levels of Rs 735.