ECONOMY

Why Jefferies Sees Gujarat Gas More Resilient To Covid-19 Second Wave Than Peers

Gujarat Gas Ltd. is expected to be least impacted by the drop in mobility as a result of the Covid-19 pandemic, given its minimal exposure to the compressed natural gas segment, according to Jefferies.

The research firm prefers the company because of its higher exposure to industries, where volumes have remained resilient during the pandemic. Gujarat Gas’ exposure to public transport—which has been affected by restrictions—comprises barely above a third of its total volumes, in comparison with more than 70% for peers Indraprastha Gas Ltd. and Mahanagar Gas Ltd.

Jefferies cited Gujarat Gas’ robust margin outlook, better pricing power and structural volume growth as additional factors. Mahanagar Gas is also a preferred player due to margin expansion in the key compressed and piped natural gas segments, although near-term volumes could be clouded by the lockdown in Mumbai, Jefferies said.

Mobility levels have fallen significantly in the key metropolitan cities of Delhi and Mumbai, which are relevant for Indraprastha Gas and Mahanagar Gas, respectively. Levels in Gujarat, key for Gujarat Gas, have been more resilient, according to the brokerage.

Retail and recreational mobility fell to 26% of normal levels by mid-April in Mumbai, the report said, adding it stood at 20% in the latter half of last month in the national capital. For Gujarat, the metric stood at 48% of normal in the second half of April.

Workspace mobility levels were at 35%, 46% and 67% of normal for Delhi, Mumbai and Gujarat, respectively, the report said, adding that with rising Covid-19 cases and restrictions, such reductions were visible across the country.

Taking all these factors into account, including CNG volume trends during the first wave of Covid-19 infections, the report estimates current CNG volumes at 50% of normal levels in Mumbai and Delhi and at 75% in Gujarat.

Earnings Risk

Fall in demand for cleaner auto fuel will also impact volumes of the three companies differently, Jefferies said. For every 10% drop in demand, overall volumes of Mahanagar Gas and Indraprastha Gas will fall by 7-8%, whereas for Gujarat Gas it’s projected at 1-2%.

“If CNG volumes continue at half the normal for Delhi and Mumbai and three-fourths of normal for Gujarat for the next three months, it could reduce 2021-22 volumes of Mahanagar Gas, Indraprastha Gas and Gujarat Gas by 1%, 9%, and 10% respectively,” the report said. As a result, the earnings per share of the three firms will drop 2%, 10%, and 12% respectively, it said.

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