Broker’s call: Gujarat Gas (Hold)

Target: INR 450

CMP: INR 467.10

Our Morbi channel checks indicate that Gujarat Gas (GGAS) sales volumes have nearly doubled from their Q3FY23 lows of around 2mmcfd as gas prices become 0.5-1 cheaper than competing propane per cubic meter, however, industrial gross margins are likely to be at around $2.7/scm.

About 85 percent of players have a dual fuel capacity (Propane/GGas) and are switching to a cheaper daily option. The ready availability of propane (commercialized by RIL, Adani, OMCs, etc.) is likely to limit GGAS volume growth in our view). At current gas prices of $40.6/scm for May 23, we calculate industrial gross margins at ₹2.7/scm (Q3 blended gross margin at ₹14.8).

Traders’ purchases of ceramic products remain low, due to high price volatility. Domestic demand is still sluggish. However, demand for ceramic exports (FY23 at Rs. 15,000 crore) is likely to grow due to lower gas and freight cost along with demand from the US, EU and GCC (Gulf countries).

We maintain our volumes and earnings for GGAS and expect high competition to keep margins/volumes in check.

Keep ‘Hold’ with DCF based PT of Rs 450 (unchanged).