Buy Gujarat Gas, target Rs 183: Motilal Oswal Securities

Motilal Oswal Securities has a buy call on Gujarat Gas with a target price of Rs 183.

The current market price of Gujarat Gas is Rs 155.30.

Time period given by the brokerage is one year when Gujarat Gas price can reach the defined target.

Investment rationale by the brokerage:
Newer investments in Morbi and nearby areas are increasingly from larger, organized players. The National Green Tribunal (NGT) order should also bring a structural shift in investment projects towards greener fuels.

Impact could be a precursor for other regions; the chemical/pharma belt of Ankleshwar-Bharuch-Vapi is equally polluting.

Competition from coal caused sales at Surat to decline from earlier peak of 1.8mmscmd to 0.8mmscmd. Emphasis on cleaner fuels should propel sales across the state.

GUJGA has won six geographical areas in the recently concluded tenth round of City Gas Distribution (CGD) bidding and should aid long-term volume growth for the company.

GUJGA has already commissioned 35 new CNG stations in FY19E and the number is likely to hit 60 by FY19-end. The company aims to open ~100 CNG stations each year, which would drive CNG volume for the company.

Current breakdown across regions — Morbi (3mmscmd), Ankleshwar (1mmscmd), Vapi (0.5mmscmd), Surat (0.8mmscmd), Rajkot (0.5mmscmd), Surendranagar (0.2mmscmd) and additional 0.5mmscmd from other areas.

GUJGA is trading at 19.3x FY21 EPS of Rs 7.6. We raise our volume assumption to 7.4mmscmd /8.2mmscmd in FY20/21 from our earlier assumption of 7.1mmscmd/7.9mmscmd. We assume EBITDA/scm of Rs 3.9/4.0. Valuing the company at 24x (unchanged) FY21 EPS of Rs 7.6, we reiterate our Buy recommendation with a target price of Rs 183 (earlier: Rs 165).