Institutional Equity Research CMP* (Rs) 212 Gas Upside/ (Downside) (%) 17 Bloomberg Ticker GUJGA IN BUY Oil & Gas | India Market Cap. (Rs bn) 146 Target Price: Rs249 Free Float (%) 18.5 Initiating Coverage | December 02, 2019 Shares O/S (mn) 688

Compelling Valuation with Superior Long-term Prospects

We initiate coverage on Gujarat Gas (GUJGA) with a BUY recommendation and DCF-based Target Share price (%) 1 mth 3 mth 12 mth Price of Rs249, which implies 17% upside from the CMP, which along with ~2% dividend yield Absolute performance 14.1 19.9 17.7 would be significantly higher than its cost of equity (12%). We expect its earnings to witness 40% CAGR through FY19-FY22E backed by PNG industrial volume growth on strict implementation Relative to Nifty 11.8 9.8 16.0 of the NGT order, ban on fuel oil use in Gujarat, Delhi Mumbai Industrial Corridor (DMIC) and switching of Tarapur industrial units to PNG. Further, CNG Sahbhagi Yojana, a government Shareholding Pattern (%) Sept’19 Jun’19 scheme, is expected to drive CNG volume in the long-term. Along with this, global LNG glut, Promoter 60.9 60.9 which is likely to maintain pressure on LNG prices, will lead to improvement in EBITDA/scm. At Public 39.1 39.1 CMP, the stock trades at 15x on FY21E EPS, lower than its long-term average of 16x (last 5 years). Pollution Control Measures to Drive PNG Industrial Volume Growth Ours vs. Consensus Estimates National Green Tribunal (NGT) has identified 38 critically polluted areas, and directed all state pollution control boards (SPCBs) to finalise a time-bound action plan to bring all such industrial (Rs bn) FY20E FY21E FY22E clusters within the safe parameters. Most critically polluted areas in Gujarat are/will be covered Net sales -R Sec 103 113 131 by GUJGA industrial PNG (Link 1). The Gujarat Pollution Control Board (GPCB) has initiated Net sales- Cons 105 119 130 strict action against 900 chemical units of Ankleshawar and Panoli in . GUJGA is % Change (2) (5) 1 selling 1.3mmscmd gas to the same region, which is guided to touch previous peak volume of 2.6mmscmd in case the NGT order is strictly implemented. We expect ban on fuel oil use in EBITDA -R Sec 15 17 19 Gujarat will create additional industrial demand to the tune of 2.2mmscmd. We expect GUJGA to EBITDA - Cons 16 17 19 post PNG industrial volume growth 14%/18% in FY21/22E. Every 1mmscmd rise in PNG industrial % Change (6) (`1) 2 sales to improve GUJGA’s FY21E EBITDA by 10%. PBT -R Sec 11 13 15 DMIC + CNG Sahbhagi Yojana = Long-term Volume Growth Driver PBT - Cons 12 12 15 About 38% of the DMIC passes through Gujarat, which is expected to attract >60% of the investment. The corridor has identified 6 nodes in Gujarat out of which 5 nodes are allocated to GUJGA. Most of these areas are either already connected or will be connected, which will drive 1 Year Stock Price Performance PNG industrial gas consumption by 0.5 mmscmd in the next 2/3 years. The Govt. of Gujarat in 220 co-operation with GUJGA and Sabarmati Gas launched CNG Sahbhagi Yojana to set up 214 200 CNG stations across the state at the cost of Rs8bn. The Gujarat Government has handed over Letter of Intent (LOI) to the 214 dealers for setting up CNG stations (Link 2). We expect GUJGA to 180 post CNG industrial volume growth 8%/7% in FY21/22E. 160 Global LNG Prices Continue to Reel under Pressure 140 Global LNG prices continue to remain under pressure owing to higher LNG supply, which rose by 120

~30mmt YoY to 240mmt in CY19 YTD. 118mmt of new LNG capacity has already been sanctioned 100 19 19 19 19 19 19 19 19 19 18 19 19 19 ------and will get commissioned over the next few years. In GUJGA’s sourcing-mix, LNG accounted - Jul Jul Oct Jun Jan Apr Feb Sep Dec Nov Aug Mar for 77%, while lower LNG prices led to rise in EBITDA/scm to Rs5.0 in 1HFY20. Sustained pricing May pressure is expected to boost GUJGA’s EBITDA/scm to Rs4.3 for FY20E/21E vs Rs4.0 in FY19. Note: * CMP as on November 29, 2019 Outlook & Valuation We expect CNG/PNG industrial volume CAGR of 8%/ 28% over FY19-22E. GUJGA’s net profit is Per Unit Analysis expected to clock 40% CAGR over FY19-22E owing to strong volume growth and healthy margin. (Rs/scm) FY20E FY21E FY22E We expect GUJGA to witness a strong FCF generation of Rs17.8bn over FY19-FY22. We initiate Net sales 31.0 30.0 29.9 coverage on GUJGA with a BUY recommendation with DCF-based Target Price of Rs249, EBITDA 4.4 4.4 4.4 based on WACC of 9.2% and 2% terminal growth rate, which implies 17% upside from the CMP , which along with 2% dividend yield would be significantly higher than CoE (12%). Net Profit 3.1 2.6 2.6

Y/E March (Rs.mn) FY18 FY19 FY20E FY21E FY22E Total Income 61,743 77,544 1,03,101 1,12,952 1,31,175 EBITDA 8,951 9,846 14,731 16,639 19,382 PAT 2,914 4,349 10,362 9,562 11,553 EPS 4.2 6.1 15.1 13.9 16.8 Research Analyst : Yogesh Patil P/E 39.0 23.8 14.1 15.3 12.6 Contact : (022) 4303 4636 EV/EBITDA 15.3 12.2 12.6 11.1 9.6 Email : [email protected] Source: Company, RSec Research 1 Institutional Equity Research CMP* (Rs) 212 Gujarat Gas Upside/ (Downside) (%) 17 BUY Bloomberg Ticker GUJGA IN Initiating Coverage | India Target Price: Rs249

Exhibit 1: Ban on fuel oil consumption would be 1.9mmscmd (~20%) Exhibit 2: GUJGA PNG industrial volume growth road map, volume gas sales volume growth for GUJARAT GAS likely to be doubled in next 4 years

MMT MMSCMD MMSCMD 16 7 6.5 25 0.2 14 0.5 6 19.9 1.0 1.0 20 12 1.0 5 1.0 2.2 10 4 15 8 2.2 3 10 6 9.8 2 4 5 0.8 2.4 1.9 5.2 1 2 4.0 3.8 4.4 4.6 0 0 0 India (FY19) (LHS) Gujarat State IF Fuel oil ban in If Ban on FO use GUJGA with 80% F2015 F2016 F2017 F2018 F2019 F2020e F2021e F2022e F2023e (GJ) (FY19) (LHS) India (RHS) in GJ share PNG (Ind) Volume Morbi - New Ankaleshwar - Paloni Fuel oil consumption (LHS) Gas Consumption (RHS) Fuel oil Ban in Gujarat Tarapur New GA expansion

Source: MOPNG, PPAC, RSec Research Source: MOPNG, PPAC, RSec Research

Exhibit 3: FY21E- EBITDA Sensitivity to PNG industrial volume Exhibit 4: We expect in GUJGA PNG industrial volume addition of 2.7mmscmd in next 3 year

Rs mn 18,000 0.2

17,500 0.5 1.0 17,000

16,500

16,000

15,500 1.0 15,000 0.2 0.4 0.6 0.8 1 (base) 1.2 1.4 1.6 Ankaleshwar - Paloni Fuel oil Ban in Gujarat

PNG industrial volume of GUJGA in mmscmd - FY21 Tarapur Region New Geography expansion

Source: Company, RSec Research Estimates Source: Company, RSec Research Estimates

Exhibit 5: Strong operating cash flow enough to fund capex Exhibit 6: Payback period for Propane infrastructure 3 to 6 year

Wall TILE VIRTIFIED TILE Propane infrastructure set up cost (Rs mn) 10 15

Daily consumption (scm) 5,000 15,000

PNG industrial price - GUJGA (Rs/scm) 30 30

Propane price (Rs/scm) 27 27

Savings on use of Propane (Rs/scm) -span 3 3 of 4 months

Savings per year (Rs mn) 1.8 5.5

Payback period for Propane infrastructure 5.5 2.7

Source: Company, R-Sec Research, Estimates Source: Bloomberg, R-Sec Research estimates, Google

2 Institutional Equity Research CMP* (Rs) 212 Gujarat Gas Upside/ (Downside) (%) 17 BUY Bloomberg Ticker GUJGA IN Initiating Coverage | India Target Price: Rs249

Investment Rationale Pollution Control Measures to Drive PNG Industrial Volume The NGT has identified 38 critically polluted areas and directed to all SPCBs to finalise a time-bound action plan to bring all polluted industrial clusters within the safe parameters. Most of the critically polluted areas in Gujarat are either covered or will be covered by GUJGA. The GPCB has initiated strict action against 900 chemical manufacturing units of Ankleshawar and Panoli in Bharuch. GUJGA is selling gas of 1.3mmscmd to the same region, which is guided to touch previous peak volume of 2.6mmscmd in case the NGT order is strictly implemented. Notably, pipeline connectivity is already in place to supply PNG to those units. A PIL is filed in the Gujarat High Court seeking a ban on the use of pet- coke and furnace oil by the industries. As per the PIL, consumption of combustible fuel oil in Gujarat is ~ 0.77MMT, which we believe to be banned in the next 1-2 year following which the industries will shift to PNG industrial. We expect ban on fuel oil in Gujarat will create additional industrial PNG demand of 2.2mmscmd. Every tonne of fuel oil will be replaced by 1.12scm of gas. Based on conservative assumptions, We expect GUJGA to post PNG industrial volume growth 14%/18% in FY21/22E. Every 1mmscmd rise in PNG industrial sales to improve GUJGA’s FY21E EBITDA by 10%.

Disciplinary Action Awaited for Violation of NGT Order Based on the CEPI criterion, the NGT has identified 100 polluted industrial clusters (critically polluted - 38; severely polluted - 31 and other polluted areas - 31). The NGT directed all state PCBs to finalise a time-bound action plan to bring all polluted industrial clusters within the safe parameters. The state PCBs and central PCB are free to take coercive measures, including recovery of compensation for damages to the environment on ‘Polluter Pays’ principle and also to adopt suitable measures on ‘precautionary’ principle. The GPCB has initiated strict action against 900 chemical manufacturing units of Ankleshawr and Panoli in Bharuch. This action is initiated after the NGT declared them as critically polluted in Jun’19. The GPCB has started penalising factories in Ankleshwar and Panoli besides issuing closure notices and demanding bank guarantees. GUJGA is selling 1.3mmscmd gas in the region, which is guided to touch previous peak volume of 2.6mmscmd in case the NGT order is strictly implemented.

PNG Industrial Volume to Rise by 2.2mmscmd post Ban on Fuel Oil in Gujarat India consumes 6.5mmt of fuel oil even after the ban in 4 states (Delhi, Haryana, Rajasthan and UP) in FY19. Gujarat consumes ~12% of total India fuel oil, which is likely to be banned sooner or the later. As per the PIL filed in the Gujarat High Court seeking a ban on the use of pet-coke and furnace oil, consumption of combustible fuel oil in Gujarat is ~ 0.77MMT, which we believe will be banned in the next 1-2 year, following which the industries will shift to PNG industrial. We expect ban on fuel oil use in Gujarat will create an additional demand of 2.2mmscmd with every tonne of fuel oil will be replaced by 1.12scm of gas. Further, the NGT has notified and sent alert to 7 GAs in Gujarat, where the GPCB is likely to take strict action (switch of fuel/fine). Out of total notified areas more than 5 are/will be covered by GUJGA (See table xx). Thus, we believe 1.9mmscmd (80%) PNG industrial volume would be supplied by GUJGA.

Tarapur to Increase GUJGA’s Volume by ~0.5mmscmd Tarapur is one of the critically polluted regions in India with the CEPI score of 93.63, which is having >100 chemical manufacturing units. The NGT has issued order to the PCB (MPCB) to prepare action plan against the polluting units in Tarapur. The MPCB is likely to take corrective actions on such units in Tarapur/surrounding region, which are still using fuel oil/ petcoke. Notably, GUJGA is setting up pipeline network on priority basis in Tarapur, following which the MPCB can initiate action against these polluting units. GUJGA expects 0.5mmscmd of potential volume sales in Tarapur and surrounding region in the next 2-3 years.

3 Institutional Equity Research CMP* (Rs) 212 Gujarat Gas Upside/ (Downside) (%) 17 BUY Bloomberg Ticker GUJGA IN Initiating Coverage | India Target Price: Rs249

Exhibit 7: Ban on fuel oil consumption would be 1.9mmscmd (~20%) Exhibit 8: India’s fuel oil consumption - industry-wide break up for gas sales volume growth for GUJARAT GAS FY18. Ban on fuel oil can increase 20 mmscmd gas consumption

MMT MMSCMD 7 6.5 25 Iron and steel 15% Chemical and petroleum 6 19.9 20 Non-ferrous metals 5 Machinery 15 12% 4 Mining & Quarrying 3 10 Construction 52% 3% Textile and leather 2 0% 0.8 5 3% 1% Non-specified 1 2.4 1.9 Transportation 0 0 1% 9% India (FY19) (LHS) Gujarat State IF Fuel oil ban in If Ban on FO use GUJGA with 80% 3% Agriculture (GJ) (FY19) (LHS) India (RHS) in GJ share Others 1% Fuel oil consumption (LHS) Gas Consumption (RHS)

Source: MOPNG, PPAC, RSec Research Source: MOPNG, PPAC, RSec Research

Exhibit 9: Sectoral gas consumption increase in India if Fuel oil banned.

mmscmd 12.0 10.4 10.0 8.0 6.0

4.0 2.9 1.9 2.3 2.0 0.6 0.7 0.0 0.1 0.1 0.2 0.5 0.0 Others specified - Machinery Agriculture petroleum Construction Iron and Iron and steel Chemical and Non ferrous metals Transportation - Textile and and Textile leather Non Mining & Quarrying

Source: IMOPNG, PPAC, RSec Research

Exhibit 10: NGT issued orders to polluted area based on CEPI score, areas under GUJGA to enhance PNG industrial volume growth Sl. No. Name of Polluted Air Water Land * CEPI Score Operating Areas of Industrial Areas (PIAs) Gujarat Gas Ltd 1 (Gujarat) 82 80.75 48.75 89.09 No 2 Ankleshwar (Gujarat) 72 57.5 51 80.21 Yes 3 (Gujarat 66 75 30 79.95 Yes 4 (Gujarat) 46 68.25 56 76.43 Yes 5 Vatva(Gujarat) 57 66 25.5 70.94 No 6 (Gujarat) 51.75 61.5 45.75 70.62 Yes 7 (Gujarat) 61 15.5 15.5 61.94 Yes * Comprehensive Environmental Pollution Index (CEPI)...... Source: CEPI, NGT, Company, RSec Research

4 Institutional Equity Research CMP* (Rs) 212 Gujarat Gas Upside/ (Downside) (%) 17 BUY Bloomberg Ticker GUJGA IN Initiating Coverage | India Target Price: Rs249

Exhibit 11: GUJGA PNG industrial volume growth road map, volume Exhibit 12: We expect in GUJGA PNG industrial volume addition of likely to be doubled in next 4 years 2.7mmscmd in next 3 year

MMSCMD 16 0.2 0.2 14 0.5 1.0 1.0 1.0 12 0.5 1.0 1.0 2.2 10

8 2.2

6 9.8 4 5.2 2 4.0 4.4 4.6 3.8 1.0 0 F2015 F2016 F2017 F2018 F2019 F2020e F2021e F2022e F2023e PNG (Ind) Volume Morbi - New Ankaleshwar - Paloni Ankaleshwar - Paloni Fuel oil Ban in Gujarat Fuel oil Ban in Gujarat Tarapur New GA expansion Tarapur Region New Geography expansion

Source: Company, RSec Research Estimates Source: Company, RSec Research Estimates

Exhibit 13: Share of GUJGA in India’s industrial PNG consumption Exhibit 14: GUJGA pipeline network and operating area

MMSCMD 14.0

12.0

10.0 7.0 8.0 4.4 4.6 3.8 6.0 4.0

4.0 6.2 4.5 5.3 5.3 2.0 3.7

0.0 F2016 F2017 F2018 F2019 F2020TD

PNG Industrial Ex GUJGA Gujarat Gas

Source: PPAC, RSec Research Source: Company, RSec Research Estimates

Exhibit 15: FY21E- EBITDA Sensitivity to PNG industrial volume Exhibit 16: Presence of GUJGA existing network in industrial belt

Rs mn 18,000

17,500

17,000

16,500

16,000

15,500

15,000 0.2 0.4 0.6 0.8 1 (base) 1.2 1.4 1.6

PNG industrial volume of GUJGA in mmscmd - FY21

Source: Company, RSec Research Estimates Source: GUJGART VIBRANT SUMMIT, RSec Research Estimates

5 Institutional Equity Research CMP* (Rs) 212 Gujarat Gas Upside/ (Downside) (%) 17 BUY Bloomberg Ticker GUJGA IN Initiating Coverage | India Target Price: Rs249

DMIC + CNG Sahbhagi Yojana = Long-term Volume Growth Driver About 38% of the DMIC passes through Gujarat, which is expected to attract >60% of total investment. The corridor has identified 6 nodes in the state out of which 5 nodes Dholera-Ahemedabad, Vadodara-Ankaleshwar, Bharuch-Dahej, Surat-Hajira and - Umargaon are allocated to GUJGA. Most of these areas are either already connected or will be connected, following which PNG industrial gas consumption would rise by 1 mmscmd in the next 2-3 years.

CNG Sahbhagi Yojana + Gujarat Govt’s Thrust for CNG Vehicles As per this scheme, GUJGA and Sabarmati Gas will set up 214 CNG stations across the state at a cost of Rs8bn. The Gujarat Government has handed over LoI to 214 dealers, who will set up CNG stations in the state. The companies will earn back the money invested in just three years. GUJGA will set up 183 stations, while Sabarmati Gas will set up 31 stations under this scheme. At present, GUJGA operates ~345 CNG stations across network supplying gas to 0.65mn vehicles (~70% of total vehicles). On an average, GUJGA sells CNG @ 4,141scm/day/station, which is the breakeven level. Looking ahead, GUJGA plans to add ~70 CNG stations annually, which will lead to ~8% CNG volume growth in FY19-FY22E. The Gujarat Government is giving special emphasis on CNG vehicles. It has allocated Rs10bn for purchase of CNG buses for the state-owned transport company. We expect addition of 1,000 CNG buses, going ahead. We expect GUJGA to post CNG industrial volume growth 8%/7% in FY21/22E. There are two models for setting up CNG stations under this scheme i.e. franchise model and OMC model. In the former, the dealers will have to arrange land at prime location, while in the latter model, the petrol pumps dealers can set up CNG stations within their extant premises. Notably, the land requirement norm for setting set up CNG station is eased to 500sqmt from 1,000sqmt with faster grant of permission.

Gujarat Govt’s Focus on Increasing PNG Household Base The Gujarat Government is planning to increase number of PNG users by FY22. In order to realise this, the one-time deposit amount for families having annual income up to Rs2lakh is reduced to Rs1,000, while the families with annual income above Rs2lakh will have to deposit Rs5,000.

Exhibit 17: GUJGA dominates in CNG stations in state Exhibit 18: Gujarat State - PNG domestic consumer break up - GUJGA supply 68% of PNG household in state.

Source: PPAC, Company, RSec Research Source: PPAC, Company, RSec Research

6 Institutional Equity Research CMP* (Rs) 212 Gujarat Gas Upside/ (Downside) (%) 17 BUY Bloomberg Ticker GUJGA IN Initiating Coverage | India Target Price: Rs249

Exhibit 19: GUJGA to add PNG household of ~1lakh/year and CNG Exhibit 20: GUJGA volume growth likely to be driven by PNG stations of ~50/year. industrial & CNG

Source: Company, RSec Research estimates Source: Company, RSec Research estimates

Exhibit 21: CNG station addition to dilute overall per day CNG sales Exhibit 22: Under CNG Sahbhagi Yojana scheme, 214 CNG stations will be add over period of 3 years

Source: Company, RSec Research estimates Source: Company, RSec Research estimates

7 Institutional Equity Research CMP* (Rs) 212 Gujarat Gas Upside/ (Downside) (%) 17 BUY Bloomberg Ticker GUJGA IN Initiating Coverage | India Target Price: Rs249

Lower Spot LNG Prices to Boost Margin Supply Glut to Continue: Global LNG supply grew by ~30mmt YoY to 240mmt in CY19 YTD. We expect global output to grow by 12% YoY to 364mmt in CY19 driven by sustained output from the existing facilities including Nigeria, the UAE, Trinidad and Egypt. Yamal LNG production stabilised at ~10% above the nameplate capacity. New trains started contributing including Cameron LNG T1 (from May’19), Prelude FLNG (from Jun’19) and Corpus Christi LNG T2 (from Jul’19). Notably, Freeport T1 exported its first cargo in Sept’19.

Exhibit 23: Global LNG glut on back of new capacity addition lined up

Source: Bloomberg, Rsec Research

LNG Supply to Rise by 6.7% YoY to 388mmt in 2020: As per our estimate, ~118mmt new LNG capacity has already been sanctioned, which will get commissioned over the next few years. Further, an additional 84mmt capacity is awaiting final investment decision outside the US. For the US alone, the figure is a whopping 200mmt. While the drop in gas pricing in CY19 is being driven by large capacity addition over past few years, the pace of these addition is not slowing down.

Exhibit 24: New LNG capacity commissioning lined up in next 2 yr. Country Project Project size Comments Start-up United States Freeport LNG T1 4.64 mmtpa Start-up has drifted from August to September. First cargo was exported on 3 Sep-19 September United States Elba Island 10 x 0.25 mmtpa Feedgas introduced into the facility, which encountered technical issues with uneven Sep-19 cooling, which caused the delay. Elba Island says it has now resolved these issues United States Freeport LNG T2 4.64 mmtpa First cargo pushed to January 2020 to incorporate delay risks Jan-20 Russia Yamal LNG T4 0.9 mmtpa As of June 2019, overall construction progress for Train 4 was about 51% Jan-20 Cameroon Cameroon 1.2 mmtpa We assume the third train at Cameroon GoFLNG will start in March 2020 Mar-20 GOFLNG T3 United States Cameron LNG T2 5 mmtpa First cargo pushed to March 2020 following contractor guidance Mar-20 United States Freeport LNG T3 4.64 mmtpa First cargo pushed to June 2020 Jun-20 United States Cameron LNG T3 5 mmtpa First cargo pushed to June 2020 following contractor guidance Jun-20 Malaysia PETRONAS' 1.5 mmtpa We added this project to our outlook. Start-up assumed in July 2020 with a Jul-20 PFLNG 2 conservative ramp-up Malaysia Tangguh T3 4.8 mmtpa Officially delayed to Q4 2021 due to delays in the supply chain. We have assumed Jan-22 Q1 2022 Indonesia Sengkang LNG 0.5 mmtpa Little clarity on start-up, which keeps being delayed. Project taken out of the forecast Jan-22 until there is more clarity Source: Bloomberg, Rsec Research

8 Institutional Equity Research CMP* (Rs) 212 Gujarat Gas Upside/ (Downside) (%) 17 BUY Bloomberg Ticker GUJGA IN Initiating Coverage | India Target Price: Rs249

Higher LNG Supply to Maintain Drag LNG Prices: China and other Asian countries helped global gas demand to keep pace with the supply growth during 2015-18. But the 40mmt LNG supply growth over the past year, led by 15mmt growth in the US, proved to be too much for the Asia to digest. Spot LNG prices, which fell below US$6/MMBtu in Mar’19, stabilised at ~US$5.5 since May’19. Going forward, we believe delay in Sino-US deal further pressuring demand from the end users, especially from the manufacturing industry, which will lead to lower LNG imports. In India, domestic gas production to ramp- up further from the current level, while the lower price for new gas (8.5% slope to 3 month average of Brent) will continue to keep pressure on LNG import volumes.

Lower New Domestic Gas (HTHP) Prices – An Opportunity for PNG Industrial: (RIL) auctioned 5mmscmd of gas production, likely to start in 2Q2020, CGD players have bagged 36% (1.8mmscmd) of the total volume at price of 8.5% slope to 3month average of Brent Prices (Gas price = US$5.2/mmbtu). This new domestic gas is available at cheaper than govt set price of US$8.32/mmbtu for deep water gas. Based on our understanding, PNG industrial product has to face competition from industrial fuels like (crude oil refined products like fuel oil and LPG). At the same time, if the CGD companies are getting a new domestic gas at lower crude oil slope, it would imply that PNG industrial product can easily compete with fuel oil and LPG. On average, RIL’s new gas is 40% cheaper than that of PLNG’s Qatar Petroleum contract and 36% cheaper than GAIL’s Cheniere Energy deal. RIL is likely to auction more volume in early 2020s from other

Exhibit 25: R- cluster gas price still cheaper than fuel oil

Source: PPAC, Company, RSec Research

Exhibit 26: At various spot LNG prices and GUJGA EBITDA margins Unit Unit Price Unit Price Unit Price Unit Price Unit Price Spot LNG $/mmbtu 4.0 4.5 5.0 5.5 6.0 Exchange Rate INR/USD 70.5 70.5 70.5 70.5 70.5 Ocean Frieght + Insurance $/mmbtu 0.5 0.5 0.5 0.5 0.5 Import Duty @ 2.5% $/mmbtu 0.1 0.1 0.1 0.1 0.2 LNG marketing Margins $/mmbtu 0.2 0.2 0.2 0.2 0.2 LNG delivered price to India port $/mmbtu 4.8 5.3 5.8 6.3 6.9 LNG delivered price to India port RS/mmbtu 338.4 374.5 410.7 446.8 482.9 Regasification charges RS/mmbtu 49.0 49.0 49.0 49.0 49.0 Pipeline Network charge RS/mmbtu 41.1 41.1 41.1 41.1 41.1 GUJGA network charges RS/mmbtu 170.0 170.0 170.0 170.0 170.0 Final Price to industrial consumer RS/scm 23.7 25.1 26.6 28.0 29.4 GUJGA PNG industrial Price RS/scm 31.0 31.0 31.0 31.0 31.0 Net operating margins RS/scm 7.3 5.9 4.4 3.0 1.6

Source: MOPNG, Company, RSec Research 9 Institutional Equity Research CMP* (Rs) 212 Gujarat Gas Upside/ (Downside) (%) 17 BUY Bloomberg Ticker GUJGA IN Initiating Coverage | India Target Price: Rs249

Risk of Alternate Fuel is Hyped; Pay-back period for Propane Infrastructure is ~6 Years: The prices of Propane –the alternative clean fuel, used by Gujarat industrial units mostly during the monsoon – continued to remain soft historically (chart- 2QFY). Thus, the consumption of Propane saves ~Rs3/scm against use of PNG industrial. Although, cost of propane gas infrastructure ranges from Rs10-15mn depending upon consumption pattern, it is mostly consumed by vitrified tiles manufacturers. Vitrified tiles unit consume ~15,000scmd gas. The cost benefit is viable only when gas consumption is higher. As per our calculation, if savings on propane usage are Rs3/scm for 4 months every year, it can pay-back the cost of propane infrastructure in ~3 years for vitrified tile manufacturers. However, wall tile manufacturers consume only 5,000scm/daily, where the pay-back period is pegged at ~6 years. We believe loss of PNG industrial volume to propane would be ~1mmscmd lower and mostly in lower propane prices period.

Exhibit 27: 2QFY-LPG prices were subdued in FY, while they follow Exhibit 28: Payback period for Propane infrastructure 3 to 6 year crude oil price movement.

Wall TILE VIRTIFIED TILE Propane infrastructure set up cost (Rs mn) 10 15

Daily consumption (scm) 5,000 15,000

PNG industrial price - GUJGA (Rs/scm) 30 30

Propane price (Rs/scm) 27 27

Savings on use of Propane (Rs/scm) -span 3 3 of 4 months

Savings per year (Rs mn) 1.8 5.5

Payback period for Propane infrastructure 5.5 2.7

Source: Bloomberg, R-Sec Research Source: Bloomberg, R-Sec Research estimates, Google

Global LNG Prices Reeling under Pressure: Spot LNG prices have been trading at ~8% slope for ~6 months. Spot LNG prices are unlikely to enjoy seasonal winter boost in Asia this year and may be well below the 10% slope to 3M average crude prices, owing to new supply and steadier demand for LNG in China. The forward curve for LNG suggests that spike in the northern winter price will be absent this year. Chicago Mercantile Exchange contracts based on the Asian benchmark spot price, the Japan/Korea Marker compiled by S&P Global Platts, show a winter price peak of US$7.02/mmBtu for February cargoes. This compares to US$5.7/mmBtu for the front-month November contract, US$6.45 for December contract, and US$6.98 for January contract. As per GUJGAS, new long-term LNG contracts could be signed for slopes below 10%, with far lower slopes available for shorter-term contracts. In fact, GUJGAS is also interested to enter into long-term LNG contracts to secure PNG industrial sourcing at >10% slope.

Exhibit 29: Spot LNG prices are still below $6/mmbtu (~10% slope to 3M avg. Brent)

Source: Bloomberg, RSec Research 10 Institutional Equity Research CMP* (Rs) 212 Gujarat Gas Upside/ (Downside) (%) 17 BUY Bloomberg Ticker GUJGA IN Initiating Coverage | India Target Price: Rs249

Exhibit 30: GUJGA gas sourcing mix; Spot LNG would be the highest Exhibit 31: Increasing spot LNG share in overall gas sorcing of GUJGA to maintain EBITDA/scm Rs 4.3

100% 5% $/mmbtu 90% 15% 19% 10.0 80% 9.0 41% 46% 53% 70% 46% 8.0 40% 60% 35% 7.0 6.0 50% 25% 5.0 40% 19% 22% 16% 15% 19% 4.0 30% 11% 10% 8% 3.0 20% 2.0 30% 29% 30% 10% 23% 22% 20% 1.0 0% 0.0 F2017 F2018 F2019 F2020e F2021e F2022e F2017 F2018 F2019 F2020e F2021e F2022e

APM Gas Ras Gas BG Spot LNG Domestic Gas Prices Long-term LNG Mid-term LNG Spot LNG

Source: Company, R-Sec Research Estimates, PPAC Source: Company, R-Sec Research Estimates, PPAC

Mundra Terminal to Reduce Transport Cost to Morbi: terminal is expected to be commissioned in December and will operate at 1.5-MMTPA capacity for the first 1½ year before scaling-up to full capacity. A 60-kms pipeline infrastructure is ready connecting Mundra to Anjar, which is connected to Morbi. ~55% of GUJGA is been supplied to Morbi region through Dahej/Hajira terminal. Once Mundra become operational, it will be the nearest LNG terminal for Morbi industrial zone. We believe the cost of transportation should come down subject to lower regasification tariffs at Mundra terminal. We expect it should be

Anti Dumping Duty - Provisional; no major threat The Gulf Cooperation Council (GCC) passed an interim/provisional order to impose anti- dumping duty ranging from 40% to 106% on ceramic products imported from India. Morbi exports 35% to 40% of its products to Gulf countries. This is a provisional duty, Morbi manufacturers are still fighting out to see as to how some more people, some more members or some more companies from Morbi get a lower duty passed because there are two companies, which have got a lower duty passed. However, anti- dumping duty will not affect to wall tile segment because the wall tile, even after the duty, Indian manufacturer remains to be the cheapest, even though there would be an anti-dumping duty. The only other competition was China and the Chinese duty is also fairly high, not as high as India, but for wall tile it does not make any difference because even after the higher duty versus China, India is still the cheapest producing nation as far as this particular commodity is concerned. As far as GVT (Glazed Vitrified Tiles) is concerned, the lower quality GVT which was basically going to Saudi will come under pressure because there is a little bit of a differential duty between India and China. Morbi ceramic cluster comprises of more than 850 tile manufacturing units, only 10% units are manufacturing vitrified tiles. If temporary shutdown of export oriented (GST) ceramic units at Morbi can drag total Morbi PNG industrial sales volume to 4.8mmscmd from current level of 5.3mmscmd. Further, Gujarat Gas’s total sales volume to fall by ~5% from current level of 9.3mmscmd to 8.8mmscmd. 5% fall in total volume for period of 2HFY20 can result into 3.5% drop in FY20E EPS

11 Institutional Equity Research CMP* (Rs) 212 Gujarat Gas Upside/ (Downside) (%) 17 BUY Bloomberg Ticker GUJGA IN Initiating Coverage | India Target Price: Rs249

Exhibit 32: Break up of number of units at Morbi region Exhibit 33: Break up of Gujarat Gas sales volume break up

Source: RSec Research, PPAC Source: Company, RSec Research

Exhibit 34: FY21E- EBITDA Sensitivity to PNG industrial volume

Rs mn 18,000

17,500

17,000

16,500

16,000

15,500

15,000 0.2 0.4 0.6 0.8 1 (base) 1.2 1.4 1.6

PNG industrial volume of GUJGA in mmscmd - FY21

Source: Company, RSec Research Estimates

12 Institutional Equity Research CMP* (Rs) 212 Gujarat Gas Upside/ (Downside) (%) 17 BUY Bloomberg Ticker GUJGA IN Initiating Coverage | India Target Price: Rs249

PNGRB consultation paper Open Access Policy – A long way to go - Open access is stated in a policy from 2007 in PNGRB act. From 9th CGD round, marketing exclusivity has been increased to 8 years. Even if marketing exclusivity of any GA gets over, PNGRB has to declare that area for open access. While the same matter has challenged in Delhi High Court. PNGRB needed to formulate the code for open access policy. The PNGRB has recently floated concept paper, which will likely take longer time to finalise the code. In historical evidences, to finalize the transportation tariff of pipelines, discussions consumed more time than expected. Along with this, the PNGRB has to overcome the matter in Delhi High Court.

Key issues for the 3rd party to enter in existing GA -The current policy of domestic gas allocation provides for the use of APM natural gas only for selling to CNG and domestic PNG and not for selling to a third-party distributor. So this continues to be a grey area which acts as a barrier to entering a GA as a third party marketing company if they have to sell CNG and domestic PNG using high cost LNG (instead of APM gas). Although marketing exclusivity has expired for most of the mature GAs, there is only one CGD operator in each GA. It makes more sense for an entity to enter into a new GA rather than into an existing GA where they would face competition from the incumbent and earn lower margins after paying for the use of infrastructure. However IOCL has expressed views to enter into the existing GA.

Returns of CGD companies are not regulated focus more on expansion - What we think: The returns of city gas distribution companies are currently not regulated in India. The focus is currently on creating infrastructure as the penetration of CNG and PNG on pan India basis is still quite low and regulating the returns would reduce the incentive of CGD companies to invest in infrastructure and strive for higher volumes. While there is no official intervention, the regulators do keep an eye on the margins made by CGD companies based on data which they are required to submit to the regulator on a periodic basis. So margin expansion is not the aim for the companies in the near term but over the long term there is scope for expanding margins triggered by narrowing of discount to petrol/diesel and greater convenience of PNG vis-à-vis LPG cylinders.

13 Institutional Equity Research CMP* (Rs) 212 Gujarat Gas Upside/ (Downside) (%) 17 BUY Bloomberg Ticker GUJGA IN Initiating Coverage | India Target Price: Rs249

Strong Operating Cash Flow Enough to Fund Capex GUJGA is planning to incur capital expenditure of ~Rs5.5bn/annum in the next 3 years excluding acquisitions, which will be met through internal accruals and least borrowing. Operating cash flow in the range of ~Rs12/annum is sufficient to fund the capex plans. In geographical expansions into new area Amritsar-Bhatinda will be the key region for new development. As guided, the Company expects to sell 0.3mmscmd gas in the next 3-4 years from Amritsar-Bhatinda. While GUJGA is planning to add >60 CNG stations in the next 3-4 years, PNG household addition run rate is guided at 1 lakh/annum.

Exhibit 35: Strong operating cash flow enough to fund capex Exhibit 36: CNG station addition +PNG connection addition

Source: Company, R-Sec- Research estimates Source: Company, R-Sec- Research estimates

Exhibit 37: GA won by GUJGA in 9th & 10th round of bidding GA won by GUJGA in 9th & 10th round of bidding Round State Geographical Area (GA) 9th Gujarat Narmada (Rajpipala) 10th Haryana & Punjab Sirsa, Fatehbad and Mansa (Punjab) 10th Madhya Pradesh Ujjain, Dewas and Indore 10th Madhya Pradesh & Rajasthan Jhabua, Banswara, Ratlam and Dungarpur 10th Punjab Ferozpur, Faridkot and Sri Muktsar Sahib 10th Punjab Hoshiarpur and Gurdaspur 10th Rajasthan Jalore and Sirohi Source: PNGRB, PPAC, Rsec Research.

14 Institutional Equity Research CMP* (Rs) 212 Gujarat Gas Upside/ (Downside) (%) 17 BUY Bloomberg Ticker GUJGA IN Initiating Coverage | India Target Price: Rs249

GUJGA PNG Growth Story Best Among CGD From long-term investment perspective, GUJGA is a safe investment considering favourable government policy towards CGD sector. GUJGA sells 77% of its total volume to PNG industrial/commercial, while MAHGL and IGL sell 75% and 72% of their CNG volume to industrial/commercial segment, respectively. Based on NITI Aayog recommendation, PNG and CNG users may have to pay market rates for PNG and CNG, respectively. A high- powered committee has recommended withdrawal of gas supply at concessional rates to CNG users and proposed direct subsidy to only domestic kitchens. There would be ~40-50% jump in PNG and CNG rates depending on volatility in international benchmark rates if the recommendation is implemented. Further, in the vehicular segment GUJGA sells only ~20% of its total volume, which is lower than that of MAHGL and IGL.

Exhibit 38: GUJGA IN sales volume break up column chart – Annual Exhibit 39: IGL IN gas sales volume break up

Source: Company, Rsec research estimates Source: CCompany, Rsec research estimates

Exhibit 40: MAHGL IN - Sales volume break up Exhibit 41: India’s CGD sector gas sales volume break up

Source: Company, Rsec research estimates Source: PPAC, Rsec research

15 Institutional Equity Research CMP* (Rs) 212 Gujarat Gas Upside/ (Downside) (%) 17 BUY Bloomberg Ticker GUJGA IN Initiating Coverage | India Target Price: Rs249

Exhibit 42: – APM gas price Exhibit 43: R- cluster gas price still cheaper than fuel oil

Source: RSec Research, PPAC Source: Company, RSec Research

Outlook & Valuation We expect CNG/PNG industrial volume CAGR of 8%/ 28% over FY19-22E, while lower LNG prices would lead to healthy EBITDA/scm of Rs4.3 in FY20E vs Rs4.0 in FY19. GUJGA’s net profit is expected to clock 40% CAGR over FY19-22E owing to strong volume growth and healthy margin. We expect GUJGA to witness a strong FCF generation of Rs17.8bn over FY19-FY22. We initiate coverage on GUJGA with BUY recommendation with a DCF- based Target Price of Rs249, based on WACC of 9.2% and 2% terminal growth rate, which implies 17% upside from the current level, which along with ~2% dividend yield would be significantly higher than the cost of equity (12%).

Exhibit 44: Peer valuation comparison EPS Growth (%) P/E (x) EV/EBITDA (x) P/Bv (x) ROCE (%) ROE (%) Company Recom FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E GAIL IN BUY 15.8 7.4 9.6 8.5 6.0 5.5 1.2 1.1 12.4 12.7 12.3 12.6 PLNG IN HOLD 19.5 11.7 14.0 13.2 9.1 7.9 3.5 3.1 23.4 24.4 25.0 23.4 MAHGL IN HOLD 21.3 3.4 12.7 12.8 8.6 7.8 3.5 3.0 28.8 24.6 29.8 25.3 GUJGA IN BUY 100.3 10.0 14.1 15.3 12.6 11.1 4.8 3.8 20.1 20.8 34.2 27.9 IGL IN NOT RATED 22.4 11.0 22.1 20.9 13.6 12.6 4.5 3.8 21.8 20.3 21.9 19.7 Source: Company, RSec Research

Exhibit 45: Net sales realization of City gas distribution companies Exhibit 46: Cost of Gas for city gas distribution companies

Source: Company, Rsec research estimates Source: Company, Rsec research estimates 16 Institutional Equity Research CMP* (Rs) 212 Gujarat Gas Upside/ (Downside) (%) 17 BUY Bloomberg Ticker GUJGA IN Initiating Coverage | India Target Price: Rs249

Exhibit 47: Operating expense of city gas distribution companies Exhibit 48: EBITDA/scm realisation of city gas distribution companies

Source: Company, Rsec research estimates Source: Company, Rsec research estimates

Exhibit 49: GUJGA IN 1 year forward P/E valuation (Consensus) Exhibit 50: GUJGA IN 1 year forward EV/EBITDA valuation (Consensus)

Source: Bloomberg, Rsec research estimates Source: Bloomberg, Rsec research estimates

Exhibit 51: Return ratio of Gujarat Gas

Source: Company, RSec Research

17 Institutional Equity Research CMP* (Rs) 212 Gujarat Gas Upside/ (Downside) (%) 17 BUY Bloomberg Ticker GUJGA IN Initiating Coverage | India Target Price: Rs249

Exhibit 52: Gujarat Gas DCF valuation (Rs Mn) FY20E FY21E FY22E FY23E FY24E FY25E FY26E FY27E FY28E FY29E FY30E EBIT 11,634 13,291 15,788 16,202 16,475 16,812 17,165 17,530 17,908 18,300 18,705 Depreciation 3,098 3,348 3,594 3,814 3,985 4,104 4,219 4,332 4,446 4,560 4,674 Adjusted Tax 582 3,345 3,974 4,078 4,147 4,231 4,320 4,412 4,508 4,606 4,708 Capex 5,500 5,000 4,000 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 FCFF 8,650 8,294 11,408 13,437 13,813 14,185 14,563 14,950 15,347 15,754 16,170

Discount Factor 0.25 1.25 2.25 3.25 4.25 5.25 6.25 7.25 8.25 9.25 10.25 WACC 9% 9% 9% 9% 9% 9% 9% 9% 9% 9% 9% Discount Factor 0.98 0.90 0.82 0.75 0.69 0.63 0.58 0.53 0.49 0.45 0.41 Discounted Cashflow 8,464 7,441 9,383 10,132 9,549 8,989 8,461 7,964 7,495 7,053 6,637

PV of Cash Flows 91,567 Terminal Growth 2% PV of Terminal Value 93,799 Total DCF Value 185,366 Rs/Share 269 Net Debt FY20E 14,160 Rs/Share 21 Equity Value 249 CMP 212 Upside 17% Source: Company, Rsec Research estimates

Key Risks f Commodity - Higher Spot LNG prices (>$6.5/mmbtu) than our assumptions f Execution - Delay in implementation of NGT orders

18 Institutional Equity Research CMP* (Rs) 212 Gujarat Gas Upside/ (Downside) (%) 17 BUY Bloomberg Ticker GUJGA IN Initiating Coverage | India Target Price: Rs249

Company Description Gujarat Gas (GUJGA), is India’s largest CGD player with presence in 25 license areas spread across 41 districts and 6 states and 1 UT, which accounts for ~11% of total CGD licenses and ~10% total authorised areas issued by the PNGRB in India and 1 transportation pipeline license. GUJGA is the largest CGD company in terms of market share with catering to >13.5 lakh residential consumers, >12,300 commercial customers, 345 CNG stations and providing clean energy solutions to >3,500 industrial units through its wide spread operations with ~23,200 km of pipeline network.

Exhibit 53: Domestic connections Exhibit 54: Gujarat Gas Market share in India CGD - CNG stations

23% 30%

70% 77%

GUJGA Others GUJGA Others

Source: RSec Research, company Source: RSec Research, company

Exhibit 55: Gujarat Gas Market share in India CGD - commercial Exhibit 56: Gujarat Gas Market share in India CGD - Industrial connections connections

47% 44%

53% 56%

GUJGA Others GUJGA Others

Source: RSec Research, company Source: RSec Research, company

19 Institutional Equity Research CMP* (Rs) 212 Gujarat Gas Upside/ (Downside) (%) 17 BUY Bloomberg Ticker GUJGA IN Initiating Coverage | India Target Price: Rs249

Exhibit 57: GUJGA areas allocated Geographical Area Original Allottee Authorisation Network Exclusivity Marketing Exclusivity Surat Ankaleshwar and Bharuch Gujarat Gas Nov'12 Mar'14 Nov'15 Rajkot GSPC Gas Oct'13 Mar'30 Oct'18 Surendranagar GSPC Gas Oct'13 2030 GSPC Gas Oct'13 2030 GSPC Gas Oct'13 2030 GSPC Gas Jan'14 2039 Kutch (West) GSPC Gas Jan'14 2039 Bhavnagar Gujarat Gas Mar'14 2039 Hazira GSPC Gas Jun'14 2028 Jun'17 UT of GSPC Gas Jan'15 2040 Valsad GSPC Gas Jan'15 2031 ( + Thane Rural) Gujarat Gas Apr'15 2040 Amritsar GSPL May'16 Bhatinda GSPL May'16 Amreli Gujarat Gas May'16 2041 Dahej -Vagra Taluka Gujarat Gas Jun'16 2041 (excluding area already authorised) Gujarat Gas Jun'16 2041 Jun'21 Dahod Gujarat Gas Jun'16 2041 Jun'21 Anand (excluding area already authorised) Gujarat Gas Jul'16 2041 Pachmahal Gujarat Gas Jul'16 2041 Narmada (Rajpipala) Gujarat Gas Sept'18 2043 Sept'26 Sirsa, Fatehbad and Mansa Gujarat Gas Mar'19 Ujjain, Dewas and Indore Gujarat Gas Mar'19 Jhabua, Banswara, Ratlam and Durgapur Gujarat Gas Mar'19 Ferozpur, Faridkot and Sri Mutksar Sahib Gujarat Gas Mar'19 Hoshiarpur and Gurdaspur Gujarat Gas Mar'19 Jalore and Siorhi Gujarat Gas Mar'19 Source: PNGRB, company, Rsec Research

20 Institutional Equity Research CMP* (Rs) 212 Gujarat Gas Upside/ (Downside) (%) 17 BUY Bloomberg Ticker GUJGA IN Initiating Coverage | India Target Price: Rs249

Profit & Loss Statement Y/E Mar (Rs mn) FY18 FY19 FY20E FY21E FY22E Income from Gas Sales 61,342 77,195 1,02,619 1,12,409 1,30,544 Gas Transmission Income 10 9 9 9 9 Other Operating Income 391 340 473 534 622 Total Income 61,743 77,544 1,03,101 1,12,952 1,31,175 Cost of Gas 46,780 60,830 81,056 88,551 1,03,531 Gross Margin 14,963 16,715 22,045 24,401 27,644 Employee Expenses 1,390 1,600 1,696 1,730 1,816 Operating Expense 4,623 5,268 5,618 6,032 6,446 Total Expenses 52,793 67,698 88,370 96,312 1,11,793 EBITDA 8,951 9,846 14,731 16,639 19,382 DD&A 2,718 2,880 3,098 3,348 3,594 EBIT 6,232 6,966 11,634 13,291 15,788 Other Income 357 1,113 946 946 946 Interest Expesnes 1,961 1,962 1,672 1,459 1,296 PBT 4,628 6,117 10,908 12,779 15,439 Provision for Taxation 1,715 1,768 545 3,216 3,886 PAT 2,914 4,349 10,362 9,562 11,553 Exceptional Item - 179 - - - Reported PAT 2,914 4,170 10,362 9,562 11,553

Balance Sheet Statement Y/E Mar (Rs mn) FY18 FY19 FY20E FY21E FY22E Share Capital 1,377 1,377 1,377 1,377 1,377 Reserves and Surplus 17,087 21,647 27,642 34,763 34,763 Total Shareholder's Funds 18,464 23,024 29,019 36,139 36,139 Total Debt 23,282 22,156 19,026 14,219 14,219 Deferred Tax Liabilities 10,455 10,455 10,455 10,455 10,455 Long Term Provisions 334 334 334 334 334 ST Borrowings 13 - - - - Trade Payables 2,931 3,523 4,695 5,129 5,997 Other current liability 11,957 13,129 11,889 11,889 11,889 Short-term provisions 49 83 83 85 86 Total Liabilities 66,333 71,275 77,699 83,971 90,918 Assets Net Block 50,927 52,887 55,297 57,350 58,596 Capital Work in Progress 4,797 4,898 4,890 4,489 3,649 Total Fixed Assets 55,724 57,785 60,187 61,839 62,245 Non Current Investments 161 160 160 160 160 Long-term Loans and adv. 695 678 678 678 678 Other Non current asset 2730.4 2322.2 2322.2 2322.2 2322.2 Current Assets 7,023 10,329 14,351 18,971 25,512 -Cash & Cash Equivalents 1,363 3,093 4,731 8,434 13,276 - Inventories 568 694 923 1,011 1,174 - Trade receivables 3,917 5,103 6,784 7,431 8,630 - Other Current Assets 690 636 845 926 1,075 - Loans & Advances 485 803 1,068 1,169 1,358 Total Assets 66,333 71,275 77,6989 83,971 90,918

21 Institutional Equity Research CMP* (Rs) 212 Gujarat Gas Upside/ (Downside) (%) 17 BUY Bloomberg Ticker GUJGA IN Initiating Coverage | India Target Price: Rs249

Cash Flow Statement Y/E Mar (Rs mn) FY18 FY19 FY20E FY21E FY22E Profit after tax 4,628 6,117 10,908 12,779 15,439 Depreciation for the year 2,718 2,880 3,098 3,348 3,594 Other Adjustments 731 1,031 181 (2,704) (3,537) Change in Working capital (247) (289) (2,451) (482) (831) Cash flow from operations 7,830 9,739 11,735 12,941 14,666 Other changes 283 (666) 946 - - Capex (4,589) (5,376) (5,500) (5,000) (4,000) Net Cash from Investing (4,306) (6,042) (4,554) (5,000) (4,000) Net change in Borrowings (2,207) (2,826) (1,522) (2,512) (2,349) Dividends paid (499) (668) (1,870) (1,726) (3,475) Net Cash flow from financing (2,707) (3,494) (3,392) (4,238) (5,824) Net Cash Flow 818 203 3,789 3,703 4,841

Key Ratios Y/E Mar FY18 FY19 FY20E FY21E FY22E Standalone EPS (Rs) 4.2 6.1 15.1 13.9 16.8 EPS Growth (%) 32.7 43.1 148.5 (7.7) 21.0 P/E 39.0 23.8 14.1 15.3 12.6 Book Value (Rs) 26.8 31.7 44.1 55.4 67.2 P/BV 6.2 4.5 4.8 3.8 3.2 DPS (Rs) 0.8 1.2 2.3 2.1 4.2 Yield (%) 0.5 0.8 1.1 1.0 2.0 EV/EBITDA 15.3 12.2 12.6 11.1 9.6 Profitability Ratios ROCE (%) 12.4 13.2 20.1 20.8 22.6 ROE (%) 16.7 21.6 34.2 27.9 27.4 Other Ratios Net Debt/Equity (x) 1.2 0.9 0.5 0.2 0.0 Debt/Equity 1.3 1.0 0.6 0.4 0.3 Effective Tax Rate (%) 37.0 28.9 5.0 25.2 25.2

22 Institutional Equity Research CMP* (Rs) 212 Gujarat Gas Upside/ (Downside) (%) 17 BUY Bloomberg Ticker GUJGA IN Initiating Coverage | India Target Price: Rs249

Rating Guides Rating Expected absolute returns (%) over 12 months BUY >10% HOLD -5% to 10% PLEASE CLICK HERE FOR PREVIOUS REPORTS REDUCE >-5%

Reliance Securities Limited (RSL), the broking arm of Reliance Capital is one of the India’s leading retail broking houses. Reliance Capital is amongst India’s leading and most valuable financial services companies in the private sector. Reliance Capital has interests in asset management and mutual funds, life and general insurance, commercial finance, equities and commodities broking, wealth management services, distribution of financial products, private equity, asset reconstruction, proprietary investments and other activities in financial services. The list of associates of RSL is available on the website www.reliancecapital.co.in. RSL is registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014

General Disclaimers: This Research Report (hereinafter called ‘Report’) is prepared and distributed by RSL for information purposes only. The recommendations, if any, made herein are expression of views and/or opinions and should not be deemed or construed to be neither advice for the purpose of purchase or sale of any security, derivatives or any other security through RSL nor any solicitation or offering of any investment /trading opportunity on behalf of the issuer(s) of the respective security(ies) referred to herein. These information / opinions / views are not meant to serve as a professional investment guide for the readers. No action is solicited based upon the information provided herein. Recipients of this Report should rely on information/data arising out of their own investigations. Readers are advised to seek independent professional advice and arrive at an informed trading/investment decision before executing any trades or making any investments. This Report has been prepared on the basis of publicly available information, internally developed data and other sources believed by RSL to be reliable. RSL or its directors, employees, affiliates or representatives do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information / opinions / views. While due care has been taken to ensure that the disclosures and opinions given are fair and reasonable, none of the directors, employees, affiliates or representatives of RSL shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way whatsoever from the information / opinions / views contained in this Report.

Risks: Trading and investment in securities are subject to market risks. There are no assurances or guarantees that the objectives of any of trading / investment in securities will be achieved. The trades/ investments referred to herein may not be suitable to all categories of traders/investors. The names of securities mentioned herein do not in any manner indicate their prospects or returns. The value of securities referred to herein may be adversely affected by the performance or otherwise of the respective issuer companies, changes in the market conditions, micro and macro factors and forces affecting capital markets like interest rate risk, credit risk, liquidity risk and reinvestment risk. Derivative products may also be affected by various risks including but not limited to counter party risk, market risk, valuation risk, liquidity risk and other risks. Besides the price of the underlying asset, volatility, tenor and interest rates may affect the pricing of derivatives.

Disclaimers in respect of jurisdiction: The possession, circulation and/or distribution of this Report may be restricted or regulated in certain jurisdictions by appropriate laws. No action has been or will be taken by RSL in any jurisdiction (other than India), where any action for such purpose(s) is required. Accordingly, this Report shall not be possessed, circulated and/ or distributed in any such country or jurisdiction unless such action is in compliance with all applicable laws and regulations of such country or jurisdiction. RSL requires such recipient to inform himself about and to observe any restrictions at his own expense, without any liability to RSL. Any dispute arising out of this Report shall be subject to the exclusive jurisdiction of the Courts in India.

Disclosure of Interest: The research analysts who have prepared this Report hereby certify that the views /opinions expressed in this Report are their personal independent views/opinions in respect of the securities and their respective issuers. None of RSL, research analysts, or their relatives had any known direct /indirect material conflict of interest including any long/short position(s) in any specific security on which views/opinions have been made in this Report, during its preparation. RSL’s Associates may have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of research report. RSL, its Associates, the research analysts, or their relatives might have financial interest in the issuer company(ies) of the said securities. RSL or its Associates may have received a compensation from the said issuer company(ies) in last 12 months for the brokerage or non brokerage services.RSL, its Associates, the research analysts or their relatives have not received any compensation or other benefits directly or indirectly from the said issuer company(ies) or any third party in last 12 months in any respect whatsoever for preparation of this report.

The research analysts has served as an officer, director or employee of the said issuer company(ies)?: No RSL, its Associates, the research analysts or their relatives holds ownership of 1% or more, in respect of the said issuer company(ies).?: No

Copyright: The copyright in this Report belongs exclusively to RSL. This Report shall only be read by those persons to whom it has been delivered. No reprinting, reproduction, copying, distribution of this Report in any manner whatsoever, in whole or in part, is permitted without the prior express written consent of RSL.

RSL’s activities were neither suspended nor have defaulted with any stock exchange with whom RSL is registered. Further, there does not exist any material adverse order/judgments/ strictures assessed by any regulatory, government or public authority or agency or any law enforcing agency in last three years. Further, there does not exist any material enquiry of whatsoever nature instituted or pending against RSL as on the date of this Report.

Important These disclaimers, risks and other disclosures must be read in conjunction with the information / opinions / views of which they form part of.

RSL CIN: U65990MH2005PLC154052. SEBI registration no. (Stock Broker: INZ000172433, Depository Participants: CDSL IN-DP-257-2016 IN-DP-NSDL-363-2013, Research Analyst: INH000002384); AMFI ARN No.29889. 23