Gujarat Gas

Gujarat Gas Ltd – Clean fuel growth

Gujarat Gas Limited (GGL) was formed in FY15 by amalgamating Gujarat Gas Company Ltd. and GSPC Gas Ltd. The new entity has emerged as India’s largest city gas distribution (CGD) player with a total sales volume of 6.2mmscmd and presence spread across 24 districts in Gujarat, Maharashtra and Union Territory of Dadra Nagar Haveli. It has a network of 15000 km-long gas pipeline and 291 compressed natural gas (CNG) stations constituting 25% of all CNG stations in the country. Within promoters- GSPL holds 54% and Gujarat Govt holds 6.5% in the company.

The NGT has ordered all industrial units that run on coal gasifiers at Morbi in Gujarat to be shut and switch to PNG or other non-coal alternative technology to curb pollution. This would bolster industrial PNG sales. Its current sales volume at Morbi is ~2.5mmscmd or ~50% of industrial piped natural gas (PNG) sales. As per reports, ~50% of Morbi tiles manufacturing capacity runs on coal, implying volume growth of ~2.0-2.5mmscmd or 40-50% of industrial PNG sales.

The details of the order are not available yet. But, according to our estimates, currently there are ~400-450 units running on coal gasifiers. Nonetheless, a blanket ban on all coal gasifiers would result in ~80-100 units going out of business completely as they would not be profitable. The rest have an option to shift to natural gas.

Previously gas from coal gasifiers was at significant discount to natural gas, thus, natural gas sales had not picked up in Morbi, despite an increase in the potential market. We estimate delivered prices (excluding marketing margin) of spot LNG are at a mere 12% premium over that of imported coal during March 2019, which is in the lower premium range of 9-74% during FY16-18. Thus switching over from coal to natural gas may be encouraged.

Unlike IGL and MGL, GGL secures 70% of its gas through LNG, given its sales mix. Volatility in LNG pricing, FX rates often weigh high on quarterly performance; on an annual basis, however, GGL seems well placed to earn Rs.4-4.5/scm EBIDTA. While its EBIDTA/scm is lower than other CGD companies, it remains insulated from abrupt changes in the gas allocation policy, for meeting CNG and domestic PNG demand.

Industrial sales (70% volumes) should grow, as existing consumers increase off-take and geographical diversification leads to customer addition. GGL is expanding its network reach in 8-10 new areas. Meanwhile, CNG sales should also see growth, as GGL improves the network and steps up consumer awareness. Pickup in domestic PNG connections should also aid overall volume growth.

From FY15-18, GGL CNG sales have registered a growth of 9% p.a; we believe that the company’s focused approach to grow its CNG retailing infrastructure on its own as well as through dealer owned dealer operated model, leading to 10-12% p.a volume growth in the next 2-4 years. GGL has won 7 new licenses (for 17 new cities) in the 9th and 10th rounds of CGD bids; so now it can sell gas in 40 areas/cities. GGL has strategically bid aggressively in areas that are either contiguous to its existing operations or have proximity to the pipeline of GAIL or GSPL. With GSPL being a group company, GGL has a natural advantage in laying spur line and tapping new consumers, far more efficiently. Notably, laying network in new areas would entail capex and we expect around Rs.500-600 cr p.a towards this, over the next 3-4 years.

India’s LNG imports surprisingly declined by 10% m-o-m in February 2019 despite slump in spot LNG prices and improved Fuel Oil (FO) cracks. Notably, the domestic power sector consumed lower LNG due to fall in power demand in Northern & Western India. Slump in spot Asian LNG prices to $4.7/ mmbtu is near to its 3 years low. FO markets have significantly improved since Q3CY18. In fact, FO cracks rallied since Q3CY18 to near multiyear high level despite fast approaching IMO 2020 (On 1st January 2020, the International Maritime Organization (IMO) will implement a new regulation for a 0.50% global sulphur cap for marine fuels. Under the new global cap, ships will have to use marine fuels with a sulphur content of no more than 0.50% against the current limit of 3.50% in an effort to reduce the amount of sulphur oxide). We believe lower spot LNG and higher FO cracks in the near-term to aid spot LNG demand in India.

GGL volumes are expected to register 10-12% growth p.a through FY19-21 on the back of 1) traction in its industrial sales; 2) focused CNG sales push; and 3) new domestic connections. Increased off take from existing consumers and network set up in new areas should equally drive such sales growth.

We believe the Company will benefit from competitive liquefied natural gas (LNG) prices over fuel oil (FO) and reducing LNG price gap over imported coal, resulting in a rise in long-term EBITDA/scm margin. GGL, is well poised to double its sales by FY 23/24 and log 15% p.a EBITDA growth thereof. Investors would consider the macro opportunity vs. near-term valuations.

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Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 10 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

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