Gujarat Gas Ltd shares are down 22% so far this month and are trading up nearly 8% from their 52-week low seen on June 23 on the NSE.
Shareholders in Urban Gas Distribution Company have two major concerns. One, spot liquefied natural gas (LNG) prices have recently climbed to around $35 per mmBtu amid ongoing geopolitical tensions. To that extent, a continued high position in LNG prices may have an impact on a company’s gas sourcing costs and, thus, margins.
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Second, there are concerns about potential competition from propane, especially in the industrial cluster in Morbi, a key market for the company. There are fears that Gujarat Gas will possibly lose much more to propane. Still, some analysts believe that concerns about the impact on demand due to the anticipated switch to propane are exaggerated.
“While around 40% of Morbi plants are setting up propane facilities, they present only a temporary challenge for Gujarat Gas in our view as contract gas is all-weather competitive versus propane. In the short term, the high cost of spot LNG is a bad game,” said Varatharajan Sivasankaran, analyst at Antique Stock Broking. The challenge due to high spot gas prices is temporary and can be resolved with tie up of term contracts. Industries’ KG-basin gas is likely to be available by December 2022, while Gujarat Gas may look at other long-term sources if competitive long-term contracts are available,” Sivasankaran said.
Analysts agree that there are challenges in considering propane as a long-term option. According to a report by Yes Securities, “While the switch to propane may be a transitional event, it is far from being a long-term option due to concerns regarding the logistics, handling, and storage of propane; consistent and consistent availability; and Piped Naturals.” Continued price advantage over gas or LNG.” Amidst these concerns, the outlook on volumes for FY23 is not very exciting. However, margin performance could be better, at least in the short term, if the company minimizes spot buying. In the March quarter, Gujarat Gas restricted its supply of gas to Morbi to reduce its dependence on costly spot LNG to protect its margins.
Gujarat Gas shares are down 31% so far this calendar year. Stock valuations are not very demanding. Based on Bloomberg estimates, Gujarat Gas stock is trading at 18 times estimated earnings for FY2024. Nevertheless, near-term challenges on volumes may keep significant upsides out.