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Strong margins lead to earnings beat; volumes largely in line
* Gujarat Gas (GGL) reported EBITDA/PAT of Rs3.21bn/1.38bn in Q3FY19, up 61%/2.3x yoy, up 78%/3.4x qoq and 33%/62% above our estimates driven by strong margins. Other income was higher at Rs154mn and the tax rate was lower at 30% versus 35% assumed.
* Gas sales volumes fell 2% qoq to 6.6mmscmd (up 4%yoy), with industrial PNG down 3% qoq to 4.5mmscmd due to the weakness in Morbi. CNG sales were up 10% yoy/2% qoq, while domestic PNG grew 4% yoy/2% qoq. Gross margins jumped 46% qoq to Rs8.1/scm on higher realizations, while opex/scm grew 7% qoq to Rs2.8. EBITDA/scm went up 81% qoq/54% yoy to Rs5.3, the highest-ever quarterly rate since the GSPC Gas merger.
* We remain positive on GGL due to its steady volume growth, aided by new areas, while the margin scenario is expected to improve on lower LNG prices and an improvement in sales mix toward CNG. We cut our FY19E volume growth from 10% to 6% yoy, but raise our EBITDA/scm by 5%, increasing our EBITDA by 1-2% for FY19-21E and FY19/21E PAT by 4%/3%. We slightly reduce our TP by 2% to Rs170. Reiterate Buy.
* Management Guidance:
The Morbi tiles sector (2.4mmscmd in volumes) has witnessed some slowdown due to competitive pressures from the Middle East; hence, volumes could be range-bound qoq in Q4 too. However, the medium-term guidance remains for 10% annual growth. The company took a Rs2/scm price cut in January, but has not decided on further cuts though LNG delivered prices are expected to fall from current US$9-10/mmbtu to US$7-8/mmbtu as the contract pricing formula adjusts. New areas including Dahej and Silvassa have contributed to 0.3mmscmd volumes and are expected to grow rapidly. Thane would also ramp up separately (5 CNG stations by FY19-end). All these areas are value markets. Against 280 CNG stations in total last year, 60 are being added with 20 already operational, another 20 ready, and 20 being installed by FY19-end, though there could be some closures too. 9MFY19 capex was Rs3.2bn with full-year guidance unchanged at Rs4.5bn. Net debt fell from Rs20.3bn to Rs19.5bn qoq. The company has bid for 11 GAs under PNGRB 10th Round of CGD bidding.
* Valuation and Outlook:
We remain positive on GGL owing to its volume growth trajectory (~10% CAGR) and improving margins from lower gas costs (in the near term) and structural improvement in the sales mix with higher share of high-margin CNG. We reduce our FY19 volume growth estimate to 6% from 10% earlier due to Q3/Q4 slowdown, though FY20 onward 10% CAGR is likely as new areas ramp up. However, we raise our FY19- 21E EBITDA by 1-2% and FY19/21E EPS by 4%/3%, due to better margins. Reiterate Buy rating on GGL, with a DCF-based TP of Rs170.
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