Clean Energy Commitment And Aggressive CNG Expansion Will Drive Earnings And Enhance Net Margins

Key Takeaways

• Strategic expansion in infrastructure and geographical coverage is expected to boost earnings and profitability for Gujarat Gas.
  
• CNG network growth and digitization efforts enhance net margins through improved efficiency and reduced operating costs.
  
• Rising LNG prices, reduced gas allocation, and potential regulatory challenges threaten Gujarat Gas's margins, sales volumes, and future earnings.

Catalysts

Engages in the distribution of natural gas in India.

• The proposed scheme of arrangement among GSPC Group companies, aimed at eliminating the layered structure, is expected to promote business synergies and unlock value for stakeholders, potentially increasing earnings growth for Gujarat Gas.
  
• The expansion of geographical coverage and the gas network is anticipated to lead to increased volumes and profitability, positively impacting revenue and earnings in the future.
  
• Strategic infrastructure development and increasing consumer adoption are positioning the CNG segment favorably in the energy market. This is expected to significantly contribute to revenue and margin growth due to lower costs and higher demand for CNG compared to petrol and diesel.
  
• The aggressive expansion and upgrade of CNG infrastructure align with Gujarat Gas’s commitment to clean energy, potentially enhancing net margins through operational efficiency and lower cost structures.
  
• The digitization drive across business operations is poised to improve operational efficiencies, which could boost net margins by reducing operating costs and enhancing service delivery.

Gujarat Gas Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Gujarat Gas's revenue will grow by 10.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.8% today to 8.5% in 3 years time.
• Analysts expect earnings to reach ₹18.5 billion (and earnings per share of ₹25.56) by about January 2028, up from ₹12.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹23.3 billion in earnings, and the most bearish expecting ₹12.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.3x on those 2028 earnings, up from 25.4x today. This future PE is greater than the current PE for the IN Gas Utilities industry at 17.7x.
• Analysts expect the number of shares outstanding to grow by 1.74% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.15%, as per the Simply Wall St company report.

Gujarat Gas Future Earnings Per Share Growth

Risks

• The increase in industrial prices due to a significant rise in LNG prices could affect the company's ability to maintain its margins, impacting net margins negatively.
  
• The reduction in APM gas allocation, with the shortfall being filled with more expensive spot or new well gas, may lead to increased costs and pressure on earnings if not passed to customers.
  
• The decline in industrial sales volumes, specifically in Morbi, due to geopolitical factors and increased competition from propane, may impact revenue negatively if it persists.
  
• The overlapping period without a long-term LNG contract post-2025 could result in higher spot market exposure, potentially affecting earnings if LNG prices remain volatile.
  
• Potential regulatory challenges, such as the PNGRB's open access regulations, could impact operational expenses and future revenue streams if unfavorable decisions are made against the company.

Valuation

• The analysts have a consensus price target of ₹531.74 for Gujarat Gas based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹750.0, and the most bearish reporting a price target of just ₹330.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹218.7 billion, earnings will come to ₹18.5 billion, and it would be trading on a PE ratio of 29.3x, assuming you use a discount rate of 12.2%.
• Given the current share price of ₹469.7, the analyst's price target of ₹531.74 is 11.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.