Markets
Why Gujarat Gas stock is losing steam
Summary
Some analysts say concerns around the impact on demand because of the anticipated switch to propane are overstatedGujarat Gas Ltd’s shares are down 22% till now in this month and are trading at about 8% above their 52-week lows seen on 23 June on the NSE.
Shareholders in the city gas distribution company have two main concerns. One, spot liquefied natural gas (LNG) prices have recently spiked to around $35 per mmBtu amid ongoing geopolitical tensions. To that extent, sustained higher spot LNG prices could have a bearing on the company’s gas sourcing costs and, thus, margins.
Two, there are worries about potential competition from propane, especially in Morbi’s industrial cluster, which is a key market for the company. The fears are that Gujarat Gas will possibly lose more volumes to propane. Nevertheless, some analysts believe that concerns around the impact on demand because of the anticipated switch to propane are overstated.
“While almost 40% Morbi plants are installing propane facilities, they pose only a temporary challenge to Gujarat Gas in our view as term contract gas is competitive versus propane across seasons. In the near-term, the high-cost of spot LNG is a spoilsport," said Varatharajan Sivasankaran, analyst at Antique Stock Broking. “The challenge because of high spot gas prices is temporary and can be resolved with tie ups of term contracts. Reliance Industries’ KG-basin gas is likely to be available by December 2022, while Gujarat Gas could consider other long-term sources in case competitive long-term contracts are available," Sivasankaran said.
Analysts reckon there are challenges in considering propane a long-term alternative. According to a Yes Securities report, “While a switch to propane could be a transitional phenomenon it is far from being a long-term alternative because of concerns with respect to logistics, handling and storage of propane; consistent and continued availability; and sustained price advantage over piped natural gas or LNG." Amid these concerns, the outlook on volumes is not too exciting for FY23. However, margin performance could be better at least in the near-term if the company curtails spot purchases. During the March quarter, Gujarat Gas had capped gas supply in Morbi to lower its dependence on expensive spot LNG to protect its margins.
The shares of Gujarat Gas have fallen by 31% so far this calendar year. Valuations of the stock are not too demanding. Based on Bloomberg estimates, the Gujarat Gas stock is trading at 18 times estimated earnings for financial year 2024. Even so, near-term challenges on volumes may keep significant upsides at bay.
