Emkay Global Financial Services has maintained 'Sell' on Gujarat Gas with revised target price of Rs 500 from Rs 656 earlier.
Commenting on the investment rationale, Emkay said, ''Considering the volume growth of 5% CAGR for FY15-FY17E and EBIDTA/SCM of Rs 4.5, our FY17EPS works out to Rs 33 a share. Assuming re-listing (expected on Sept.15, 2015) of Gujarat Gas stock at Rs 800, the one year forward implied P/E multiple is 24x, which we believe is too expensive, given its lacklustre growth and limited scope for margin expansion in the event of availability of cheaper alternative fuel.
Due to availability of cheaper alternate fuels in the current scenario of low crude oil prices, we expect slow recovery in volume growth in the near term. Currently, FO and Naphtha are still available 10% cheaper than LNG. However, we expect 5% CAGR volume growth over FY15-17E, on the back of geographical expansion in new areas coupled with pick up in industrial demand on lower spot LNG prices (~USD 6-6.5/mmbtu) in ensuing quarters. By end of FY16, company may touch ~6.5mmscmd volume from current level of ~6.1mmscmd.
Considering the capex plan of Rs18 billion for the next 3 years, we see further increase in ebt from the current level of Rs 14 billion. This would put further pressure on earnings due to higher interest costs
Long term growth prospects of the company still remain intact. However, the near term challenges in maintaining volumes and margins coupled with expensive valuations, compel us to maintain our Sell rating with a revised TP of Rs 500 from Rs 656 earlier.''
Disclaimer: IRIS has taken due care and caution in compilation of data for its web site. Information has been obtained by IRIS from sources which it considers reliable. However, IRIS does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. IRIS especially states that it has no financial liability whatsoever to any user on account of the use of information provided on its website.
