Prabhudas Lilladher maintains a “Hold” rating on Gujarat Gas Limited (GUJGA), with a target price of Rs 565, slightly above its current market price of Rs 541. While the company’s recent performance shows resilience in a challenging market, declines in Morbi sales and reduced growth guidance reflect some operational headwinds. Gujarat Gas has strategically increased its EBITDA/scm guidance, projecting steady margins in the near term. The company continues to focus on regional expansions and CNG pricing adjustments to offset higher procurement costs. This report provides an in-depth analysis of Gujarat Gas’s operational highlights, financial health, and forecasted performance.

Quarterly Operational Performance

Volume and Revenue: GUJGA reported Q2 volumes of 8.8 million metric standard cubic meters per day (mmscmd), marking a 6.1% year-over-year (YoY) decline and a sharp 20.3% quarter-over-quarter (QoQ) drop due to lower Morbi sales. This decline impacted overall revenue, which stood at Rs 37.8 billion, down by 15% QoQ.

EBITDA Decline: The company’s earnings before interest, taxes, depreciation, and amortization (EBITDA) fell by 4% QoQ to Rs 5.1 billion, slightly below market estimates. Notably, the EBITDA per standard cubic meter (scm) increased by 19.1% to Rs 6.4, driven by an improved margin in the face of declining volume.

Challenges in the Morbi Segment

Morbi Sales Impact: GUJGA’s Morbi volume dropped to 2.86 mmscmd for Q2, with projected growth to 3.5–4 mmscmd in Q3. The decline stems from seasonal factors and export-related challenges, underscoring the market volatility faced by this segment.

Non-Morbi Segment Performance: Non-Morbi sales reached 2.05 mmscmd, bolstered by a modest 8.6% YoY rise in domestic PNG volumes and an 11.8% YoY increase in CNG sales. Despite an overall volume contraction, the non-Morbi segments provided some stability for GUJGA.

Financial Outlook and Revised Guidance

Growth Projections: GUJGA revised its volume growth guidance to 5–7% YoY, slightly lower than previous estimates. The company anticipates a 7% compound annual growth rate (CAGR) in volume over FY25–FY27, with targeted volumes of 11.5 mmscmd by FY27.

Margin Stability: Prabhudas Lilladher forecasts an EBITDA/scm of Rs 5.5 for FY26 and FY27, highlighting Gujarat Gas’s efforts to maintain operational efficiency despite market challenges.

Key Financial Metrics

Revenue and Profit Growth: GUJGA is expected to reach a revenue of Rs 173 billion in FY25, a 10.5% YoY growth, with projected revenues of Rs 195 billion and Rs 210 billion for FY26 and FY27, respectively.

Adjusted PAT: The company’s adjusted profit after tax (PAT) was Rs 3.1 billion for Q2FY25, showing a 3.1% YoY increase. The PAT growth rate for FY25 is anticipated to be 13.3%, with a gradual increase to Rs 14 billion by FY27.

EPS and Dividend Forecast: Earnings per share (EPS) are projected to grow from Rs 16 in FY24 to Rs 20.1 by FY27. Gujarat Gas has consistently distributed dividends, with an expected dividend per share (DPS) of Rs 6.8 in FY27.

Regional Expansion and Pricing Strategy

CNG Segment Growth: GUJGA has seen robust 12% YoY growth in Gujarat’s CNG volumes and 25% growth outside Gujarat. The company is considering further CNG price adjustments following the reduction in APM allocations, aiming to manage procurement cost hikes effectively.

Capex Allocation: The capital expenditure for FY25 is projected at Rs 8–10 billion, focusing on expanding gas supply to industrial regions such as Surat, Ankleshwar, and Bharuch. Gujarat Gas is also targeting growth in Ahmedabad rural, Silvasa, and Dahej.

Market Comparisons and Valuation

Valuation Metrics: GUJGA’s price-to-earnings (P/E) ratio is currently at 29.8x for FY25 and is expected to decline gradually to 26.9x by FY27. Prabhudas Lilladher values Gujarat Gas at Rs 565, implying a modest upside based on its FY26–27 earnings per share (EPS) average.

Comparison with Peers: GUJGA's 12-month trailing stock performance shows a 29.5% increase, with a dividend yield of 1.1% projected for FY25. The company's capital structure remains robust, with a net debt-to-equity ratio anticipated to stay at -0.2x, reflecting a strong balance sheet.

Investment Outlook and Recommendations

“Hold” Rating and Target Price: With a target price of Rs 565 and a “Hold” rating, Prabhudas Lilladher advises cautious optimism for Gujarat Gas. The stock offers limited near-term upside due to challenges in the Morbi segment and increased cost pressures.

Entry and Exit Points: Investors should consider entering at a price range of Rs 530–540, with an exit target between Rs 560–570, depending on market stability and operational performance in the upcoming quarters.