Shares Gujarat Gas Ltd fell over 3 percent on Friday after brokerage firm Jefferies downgraded the stock to 'underperform' from 'buy', and reduced the target price by nearly 30 percent to ₹400.
The brokerage believes that the company's pricing power, margin outlook, and volume growth will be structurally hampered in the medium term due to Morbi's roughly 50 percent investment in propane/liquefied petroleum gas (LPG) capacity and the outlook on spot liquefied natural gas (LNG) prices firm.
"Previously, LNG supplied by the company was the default fuel and customers switched when propane was ₹2-3/ standard cubic mete (scm) cheaper than LNG. Now, customers will switch when LNG is ₹2-3/scm cheaper than propane. This structurally reduces the company's pricing power, volume growth and margin outlook in our view," explained the brokerage.
The brokerage has cut volume estimate 17/15 percent for FY24-25E, and reduced FY24/25E earnings before interest, taxes, depreciation, and amortisation (EBITDA)15 percent due to lower volumes and compression in margins. It expects the company to deliver 5 percent earnings per share (EPS) compound annual growth rate (CAGR) over FY22-25E.
"As volumes recover over FY24E, it would likely make healthy margins on the term feedstock. Once it needs to blend Spot LNG feedstock, margins will compress unless propane price increases/Spot LNG falls," added the brokerage.
On the technical front, the stock has fallen 37.59 percent from 52-week high of ₹721.8 recorded on January 14, 2022. The weekly average delivery volume of the stock is 47.99 percent.
"Today the stock prices have broken 460 levels, which previously acted as strong support in the last few months. As long prices stays below 460 level any bounce may face resistance and further down side towards 430 may be expected," said Rajesh Bhosale - Equity Technical and Derivative Analyst, Angel One.