The only PSU stock flying high, holds promise to rise further | Economic Times

MUMBAI: How often do you come across a PSU that is performing consistently well on the bourses? This city gas distributor, the country’s largest, is in no mood to slow down, and is the only state-run company whose stock has been ruling at record high levels.The company is Gujarat Gas.Stellar quarterly earnings, a booster to its key market in Morbi, a ceramic hub, as huge anti-dumping duty levied on Chinese ceramics by many countries, including the US, has further boosted the prospects of this stock.The stock has risen 42 per cent so far this year, and scaled a record high of Rs 345 on Wednesday. It is the second-best performing PSU stock so far this year, after Indian Railway Catering and Tourism Corporation (IRCTC), which is up 45 per cent for the year to date.This performance compares with the BSE PSU Index, which has eroded 24.3 per cent value in the same period, while BSE Sensex has risen 6.2 per cent.The stock price of Gujarat Gas has doubled in last three years, and 209 per cent in last five. The company has transitioned to a PSU from being an MNC unit until 2012.The BG Group acquired a majority stake in Gujarat Gas Company in 1997. In October 2012, it sold its 65 per cent stake for around $470 million to GSPC Gas, a unit of the state-run Gujarat State Petroleum Corporation (GSPC).GSPC Gas and Gujarat Gas Company were merged in 2015 to give birth to Gujarat Gas.Analysts have been most bullish on the stock in recent times after the company’s stellar quarterly earnings. At last count, the stock had 15 ‘strong buy’, 7 ‘buy’, 4 ‘hold’, 2 ‘sell’ and 1 ‘strong sell’ ratings, data from publicly-available Reuters Eikon database showed.A month ago, the stock had 12 ‘strong buy’ and 10 ‘buy’ recommendations.The company reported spectacular earnings growth on a sequential basis, while its standalone profit for the second quarter of fiscal 2021 stood at Rs 475 crore, compared with Rs 59 crore in the previous quarter.Angel Broking on Wednesday came out with a ‘buy’ rating on the stock, after the company reported 6.4 per cent volume growth for September quarter while Mahanagar gas and Indraprastha gas reported 37 per cent and 16 per cent degrowth, respectively.The brokerage said volumes are back to pre-Covid levels on strong demand from the industrial sector, which drives 80 per cent of the company’s total volumes.“Industrial demand is very strong in Morbi. Morbi ceramic is likely to get further boost on strong demand from the US, as they have imposed 200 -300 per cent of import duty on Chinese ceramic,” Yash Gupta- Equity Research Associate, Angel Broking.Morbi, Gujarat's largest industrial cluster by energy consumption, is a key market for the company. It accounts for around 60 per cent of total demand for Gujarat Gas. Around 90 per cent of India's, and 5 per cent of the world's, ceramic items are produced in Morbi.On November 23, Jefferies came out with a ‘buy’ rating on the stock, and set a price target of Rs 415. “With longer-term growth potential (less mature portfolio) and upside optionality of policy-driven volume upside, which is also higher than peers, Gujarat Gas remains our top pick,” Jefferies analysts said in a note on Indian city gas distributors.On November 5, Prabhudas Lilladher reiterated a ‘buy’ rating on the stock, while raising its price target to Rs 403 from Rs 388 earlier.The company reported strong Q2 earnings, led by higher-than-expected volumes and record spreads due to opportunistic sourcing of LNG.“Gujarat Gas’ competitive intensity will come down given the ban on cheaper liquid fuels. This will help smoothen margin and earnings, thereby reducing valuation discount to IGL. GGAS remains best play on rising trend to ban polluting fuels in industrial areas,” PL analysts saidThey also pointed to the strong demand for Indian ceramic tiles in US given that the country has imposed 200-350 per cent duty on Chinese imports, which will drive Morbi gas demand.Not everyone is optimistic on the stock.On November 6, Ambit Capital maintained a ‘sell’ rating on the stock, and raised its price target to Rs 260 from Rs 258 earlier, as it believes the company’s margins are too good to sustain.“Given its industrial skew and lower prices of alternate fuels, we believe that Gujarat Gas’ pricing power is limited. This would, in turn, compress margins,” Ambit analysts said in the note.They said Gujarat Gas is a play on gradual adoption of clean fuel by SMEs, rapid urbanisation and improving competitiveness of natural gas.“The current quarter performance is due to Gujarat Gas serving incremental volumes via cheaper spot gas. But that has now changed. Volatility makes us uncomfortable with its consumer-like valuations of 20 times FY22E P/E,” they said.Surprisingly, FIIs have been trimming their stake in the company for four quarters now. A total of 179 FIIs held 9.07 per cent stake in the company at the end of September, compared with 12.06 per cent a year ago.Mutual funds, on the other hand, have been raising their stake on the stock. They owned 7.14 per cent in the company at the end of September, compared with 4.41 per cent at the end of June 2019.