Restructuring And CNG Expansion Will Simplify Structure And Boost Future Efficiency

Key Takeaways

• Restructuring aims to simplify corporate operations and enhance value, potentially leading to improved margins and earnings.
  
• Aggressive CNG infrastructure expansion and strategic pricing advantage are expected to boost sales and revenue growth.
  
• Higher LNG prices, reduced gas allocation, and contract expirations could impact margins and revenue, with risks from fuel shifts and GST uncertainty further pressuring performance.

Catalysts

Engages in the distribution of natural gas in India.

• The proposed scheme of arrangement among GSPC Group companies aims to simplify the corporate structure, promote business synergies, and unlock value for stakeholders. This restructuring could lead to operational efficiencies and cost savings, potentially improving net margins and earnings.
  
• Gujarat Gas Limited is aggressively expanding its CNG infrastructure, adding new stations, which could significantly increase sales volumes. This expansion, alongside the increasing adoption of CNG as an alternative fuel, is likely to positively impact revenue and volume growth.
  
• The company is investing in new technologies, such as hydrogen blending and biogas injection, which are part of its ESG initiatives. Successful implementation of these could lead to new revenue streams and enhance the company's environmental credentials, potentially improving net margins through sustainable practices.
  
• Gujarat Gas is experiencing steady growth in the domestic and commercial segments, with expectations of increased connections as new areas mature. This customer base expansion can lead to increased revenue and improved earnings over time.
  
• With strategic infrastructure development and the competitive pricing advantage of CNG over petrol and diesel, the company is poised to achieve high CNG sales. Continued CNG volume growth will likely contribute to rising earnings and potentially higher EPS.

Gujarat Gas Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Gujarat Gas's revenue will grow by 12.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.7% today to 6.6% in 3 years time.
• Analysts expect earnings to reach ₹15.3 billion (and earnings per share of ₹22.57) by about April 2028, up from ₹12.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹18.0 billion in earnings, and the most bearish expecting ₹10.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 30.3x on those 2028 earnings, up from 23.3x today. This future PE is greater than the current PE for the IN Gas Utilities industry at 19.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.53%, as per the Simply Wall St company report.

Gujarat Gas Future Earnings Per Share Growth

Risks

• The increase in LNG prices by more than 20% since September 2024 and the expected high natural gas prices due to geopolitical factors could adversely impact the competitiveness of natural gas compared to alternate fuels, affecting revenue and margins.
  
• The reduction in the APM gas allocation by close to 45% resulted in higher sourcing costs for natural gas, potentially impacting profit margins.
  
• The Morbi ceramic market faces challenges with propane prices significantly lower than natural gas prices, which may lead to a shift in fuel preference, impacting industrial sales volumes and revenue.
  
• The expiration of key gas sourcing contracts, such as those with Reliance, could lead to difficulties in securing gas at favorable terms, impacting cost of goods and eventual earnings.
  
• The uncertainty around when natural gas will come under the purview of GST adds potential risk related to cost structure and pricing strategies, which could affect financial performance and competitiveness.

Valuation

• The analysts have a consensus price target of ₹472.929 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 ₹615.0, and the most bearish reporting a price target of just ₹350.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹232.9 billion, earnings will come to ₹15.3 billion, and it would be trading on a PE ratio of 30.3x, assuming you use a discount rate of 12.5%.
• Given the current share price of ₹429.25, the analyst price target of ₹472.93 is 9.2% 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.