Profit up 28% but Ambit says still ‘sell’ Gujarat Gas; Here's why

Gujarat Gas reported a 28% increase in its consolidated net profit for the fourth quarter ended March 31, 2022. It's total consolidated income rose from ₹3,514 crore to ₹4,719 crore in the same quarter.

However, its yearly performance is where the story lies.

The company's full year profit rose just 1%, to ₹1287.37 crore as against ₹1270.37 crore.

Vivekanand Subbaraman, and Gaurav Jhunjhunwala of research firm Ambit, in a a note on May 11, said, “We believe that it would be difficult for Gujarat Gas to grow volumes and maintain margins in the current macro environment.”

While giving the ‘sell' call on the stock, they said, the company needs to choose between volume growth and margin.

Ambit research gives a ‘sell’ call on a stock when it expects a stock to deliver less than or equal to 10% returns over the next 12 months.

The duo further wrote, “EBITDA beat our/consensus estimates by 42% due to reduction in spot LNG exposed volumes. Spot LNG prices remained elevated but gross margin came in sharply higher at Rs10.4/scm. This compares to Rs4.6/scm in third quarter and Rs7.0/scm in fourth quarter of last year. Overall volume dropped 13%/17% quarter-on-quarter/year-on-year due to lower industrial volumes. The company said that it is currently flowing +10.5 mmscmd vs. 12.0 mmscmd envisaged in near term.”

Defending margins

The company is flowing total gas volume of 10.5+ mmscmd vs. 12.0 mmscmd envisaged in the near term, reflecting its stance of prioritising margins over volume growth. “The ~1.5 mmscmd reduction in volume is due to the price-sensitive industrial customers (especially in Morbi), who may return once prices normalise. In FY22, Gujarat Gas added 155 new CNG stations, connected 154,000 new homes and contracted 423 industrial customers that can drive up volume by 1 mmscmd. But we think that these industrial consumers will be price sensitive akin to its current customer base.”

What next?

“We believe that it would be difficult for Gujarat Gas to grow volumes and maintain margins in the current macro environment. Key risk to our ‘sell’ stance is pollution curbs in more clusters forcing industrial units to opt for Gujarat Gas’ supply,” they said, adding, “We view the blowout margin performance as an aberration and hold on to our below-consensus estimates for Gujarat Gas.”