GUJARAT GAS Improving outlook on volumes

Gujarat Gas Limited Q2 FY25 Summary

Key Pointers from the Call

• GGL is the largest city gas distribution company in India, operating in 27 geographical areas across six states and one union territory.
• The company has filed a scheme of arrangement with stock exchanges to eliminate the layered structure of the GSPC group, promote business synergies, and unlock value for stakeholders.
• GGL has been able to grow CNG volumes by 12% year-over-year.
• They have added nine new CNG stations during the quarter, bringing the total to 820 stations.
• The company is planning to increase the blending level of its hydrogen blending pilot project after receiving necessary regulatory approvals.
• GGL is evaluating options to increase CNG prices in the near future to offset the increased cost of gas procurement due to a reduction in APM gas allocations.
• They are seeing positive growth in the domestic segment, with a customer base of over 2.19 million domestic customers.
• GGL is targeting new markets in Ahmedabad rural, Silvassa, and the Daman, Diu and Silvassa markets.
• The company is looking to enter the LNG trucking business and is in the process of surveying routes connected to major ports in Gujarat and expressways coming up in and around Gujarat.
• GGL’s EBITDA margins are expected to be in the range of 5 to 6 rupees going forward.
• The company maintains a focus on expanding geographical coverage, and expanding its gas network to lead to increased volumes and profitability.

Key Financials

Gas Sourcing Details:

• APM Gas: 31%
• Long-term Contracts: 35%
• Spot LNG: 34%

Average price of spot LNG: ₹37.4 per SCM

Future Outlook

• GGL expects the number of customers in the domestic and commercial segments to increase over time as new areas mature.
• The company is hopeful that volumes will recover in Q3 FY25.
• Management believes that expanding geographical coverage and expansion of the gas network will lead to increased volumes and profitability.
• GGL is in discussions for a new LNG contract to replace the volumes from the BG contract that will expire in mid-2025.
• The company is evaluating options for deploying operating cash flow, including diversifying into renewables and hydrogen.
• GGL aims to grow its presence in the industrial segment, targeting the Ahmedabad rural, Silvassa, and the Daman, Diu and Silvassa markets, and expects volumes in these areas to grow substantially in the next few years.
• The rollout of the FDO scheme is expected to ramp up in the coming quarters, with 125 franchisees already having accepted LOIs.
• When replacing expiring contracts, GGL will prioritize oil-linked contracts but will also include some Henry Hub exposure.
• Overall volume growth guidance for FY25 remains at 5-7%.

Challenges

• Reduction in APM Gas Allocation: GGL has seen a significant reduction in APM gas allocation, which is being replaced by higher-priced new well gas and spot LNG. This will impact margins in the coming quarters.
• Competition from Propane: GGL faces competition from propane in the industrial segment, especially in the Morbi region. The company is working to convert propane users to natural gas, but price fluctuations in propane can make this challenging.
• Maintaining Volume Growth: While GGL has a positive outlook for volume growth, achieving its target of 5-7% growth will depend on factors such as the pace of infrastructure development, competition from alternative fuels, and economic conditions.
• Passing on Increased Gas Costs: The recent reduction in APM gas allocation and the increase in spot LNG prices will require GGL to pass on these costs to customers. The company will need to carefully balance price increases with maintaining its competitiveness against alternative fuels.
• Exposure to GSPC: The proposed merger with GSPC creates indirect exposure to GSPC’s performance until the merger is finalized. While GSPC is not a listed entity, its performance will be closely watched by investors and analysts.