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At the cusp of both margin expansion and strong volume growth
The global LNG market is set to enter a record supply surplus from early 2025, with the global propane market also witnessing a huge demand surge in CY24-25 (given huge propane dehydrogenation-PP (PDHPP) capacity coming online in China). So, led by such twin catalysts, we expect both margin expansion and strong volume growth through H2FY25 to at least till FY26. We recommend GUJGA as the best play among gas stocks.
Four-year global LNG surplus super-cycle to begin from early 2025
Per our analysis, globally, expect a sharp 192mn tonne capacity addition in LNG export in CY24E-28E versus 400mn tonnes global trade in CY23 - an addition of 17/47/59mn tonnes in CY24E/25E/26E. Annualized capacity addition in CY24E-28E at 38mn tonnes may be higher than 29mn tonnes in the prior LNG surplus cycle in CY16-20, when LNG price, as a percentage of crude oil price (LNG slope), fell from 15% to 9%, making LNG cheaper (in a sustained manner) than propane.
China's PDHPP addition drive to balance oversupplied propane market
A wave of new PDHPP and cracker plants are under construction globally, driven by China. Expect a massive capacity addition of 14.7mn tonnes of PDHPP in China and 2.8mn tonnes of cracker in Asia in CY23-25E. Thus, Asia LPG demand may grow ~15mn tonnes in CY23-25E, balancing the oversupplied propane market in view of Russia-Ukraine war - US raised LPG export to ~50mn tonnes in CY23 from 42mn tonnes in CY21.
Volume from Morbi facility to rise ~50% in FY26E versus FY24 level
GUJGA's daily sales per industrial customer in FY24 were ~1,300scm versus ~2,000scm in FY20, as users partly shifted to propane. So, favorable gas prices versus propane should bring back lost volume and drive volume growth for the Morbi facility by 65% to 6.5mmscmd in FY24-26E, which should be reflected from H2FY25. Also, cheaper LNG versus propane may lead EBITDA/scm margin to the upper end of guidance (>INR 5.5/scm by FY26E). Per sensitivity analysis, every 1mmscmd volume rise would improve FY26E EPS by INR 2.5 or 8.9% and every INR 1.0/scm jump in EBITDA margin would improve FY26E EPS by INR 5.1 or 16.7%.
Valuation: Reiterate Buy; TP retained at INR 745
We reiterate BUY as GUJGA is set to benefit from LNG surplus and a surge in propane demand, resulting in a rise in long-term EBITDA/scm margin (to sustain at >INR 5.5/scm) and a gas volume CAGR of 18% in FY24-26E. Our DCF-TP of INR 745 (unchanged) assumes a 10.5% WACC (unchanged) and a 4.0% long-term demand growth. |
