Gujarat Gas swallows hefty price cut to swell volume growth

Gujarat Gas has cut prices for industrial PNG supplies by 8%. (Image: Pixabay)
Gujarat Gas has cut prices for industrial PNG supplies by 8%. (Image: Pixabay)


  • As such, the competition from alternative fuels in Morbi might keep margins in check

Gujarat Gas Ltd has undertaken a significant 8% price cut to 41.7 per standard cubic metre for its industrial piped natural gas (PNG) supplies to the Morbi cluster, effective 1 March. This move is expected to push up near-term volumes, especially considering that the Morbi region contributed to approximately 40% of Gujarat Gas' total sales volumes, which stood at 9.16 million standard cubic metres per day (mscmd) during the December quarter (Q3FY24). Notably, the majority of volumes in the Morbi region comprise industrial PNG.

The company has also benefited from the recent dip in spot LNG prices. So far in Q4, prices have declined to around $8 per mBtu from the November peak of $12 mBtu, and could help the company boost its industrial volumes, according to Swarnendu Bhushan, an analyst at Prabhudas Lilladher.


However, this positive outlook may be tempered by the potential decrease in propane prices. In Morbi, customers often opt for propane as an alternative fuel when natural gas prices surge. “As underlying propane prices begin to decline from May, we see risks to the volume recovery and expect limited benefits from Gujarat Gas’ move," said Hemang Khanna, analyst at Nomura Financial Advisory and Securities (India). Moreover, overall weakness in the ceramic industry could mean that Morbi volumes may grow just marginally in FY25.

As such, the competition from alternative fuels in Morbi might keep margins in check. In Q3, Ebitda (earnings before interest, taxes, depreciation, and amortization) per standard cubic metre (scm) was at 4.87 versus 5.92 in Q2. Gujarat Gas plans to maintain this within the range of 4.5 and 5.5 per scm in the long term. It also aims to strike a balance between volumes and margins, the company had said in its latest earnings call.

Meanwhile, shares of Gujarat Gas have seen a 26% increase over the past six months, indicating that the market has already priced in many of the company's growth prospects and risks.

Nevertheless, valuations are pricey with the stock trading at nearly 27 times estimated FY25 earnings. According to Nomura, it is one of the most expensive gas utilities globally despite prevalent concerns on volume growth. Plus, rising electric vehicle adoption poses a risk for the company’s high margin compressed natural gas (CNG) business.

Hereon, investors should track propane prices given the competitive intensity in Morbi. Additionally, a delay in developing new geographical areas, and a sharp rise in spot LNG prices could hurt the utility's volume growth prospects.

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