Gujarat Gas Slashes Industrial Gas Prices, Sparks Investor Interest

Gujarat Gas a prominent player in the city gas distribution sector recently made headlines on with its reduction in industrial gas prices by around ₹3.5 per standard cubic meter amounting to an 8% price cut has gained attention from investors and industry experts alike. In the backdrop of declining volumes particularly in the industrial segment during the third quarter of fiscal year 2023-2024 the company anticipated the need for a price adjustment to stimulate industrial gas volumes.

Industry Dynamics

Morbi industrial cluster crucial for the ceramic segment experienced subdued gas volumes in January and February ranging between 4 and 4.2 million metric standard cubic meters per day. Anticipating competitive pressure from propane prices in the market Gujarat Gas proactively reduced industrial gas prices to maintain market share and attract higher volumes.

Gujarat Gas share price witnessed a positive response broking firm UBS upgraded the stock rating from 'sell' to 'neutral' and raised the target price from ₹380 to ₹610 per share citing optimism regarding volumes and margins driven by softening spot LNG prices.

Despite the positive market response uncertainties remain about the immediate impact of the price cut on volumes. Success of this strategic move hinges on resolving challenges faced by the Morbi ceramic cluster including sluggish demand in domestic and export markets, disruptions in the Red Sea, and elevated freight costs. The company's market capitalization stands at ₹38,918.14 crore with returns of approx 23% over the last six months.

Nomura expectations

Nomura a brokerage firm has expressed caution regarding Gujarat Gas's current stock price stating that it already reflects the expected near term volume gains from the recent industrial PNG price cut to the Morbi cluster. Nomura suggests that investors may find the current stock price an opportune moment to exit the stock maintaining a 'reduce' rating with an unchanged target price of ₹505 per share.

Nomura expects the price cut to drive a short term increase in volumes especially with propane prices expected to remain elevated over March April 2024 and the swift transition from propane to natural gas for Morbi consumers. However, it highlights potential risks to volume recovery as propane prices decline from May onwards with limited benefits expected from Gujarat Gas's move due to factors like futures prices for propane and input gas costs based on LNG futures prices.

Brokerage anticipates a decline in propane prices by ₹2.8 per scm in the June quarter with input costs projected to decrease only by ₹1.5 per scm. Further decline in propane prices by ₹3.7 scm is expected in the second quarter while prices are anticipated to rise modestly by ₹1 per scm over the second half of FY25.

Nomura warns that if Gujarat Gas fails to achieve volume recovery from the Morbi price cuts and falls short of management's guidance of 10% overall volume growth and unit EBITDA at the higher end of ₹5.5 per scm it could lead to cuts in EBITDA and EPS estimates for FY25 by 11% and 14% respectively.

To Summarize

Gujarat Gas' decision to reduce industrial gas prices reflects its proactive approach to addressing market dynamics and maintaining competitiveness. While the market awaits the resolution of industry challenges investors are cautiously optimistic about the company's prospects buoyed by the positive response to its strategic move.