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But a city gas distribution company has become a clear winner in terms of stock price performance. Gujarat Gas, the country’s largest city gas distributor, has seen its stock rise nearly 73 per cent so far this year to hit a record high on Monday. Analysts are optimistic the stock may see more gains in the days to come.
It is the only city-gas distributor company that has no ‘sell’ ratings from analysts currently, data from Reuters Eikon showed. As of Monday, December 9, the stock had 12 ‘strong buy’, nine ‘buy’ and three ‘hold’ ratings. It is also the only stock in the sector that has delivered positive returns over one-year, two-year and three-year periods.
The stock hit a record high of Rs 231.65 on the bourses on Monday, and delivered 80.77 per cent return for one year, 35.64 per cent for two years and 109.16 per cent for three years.
On December 2, Reliance Securities initiated coverage on the stock with a ‘buy’ rating and a price target of Rs 249
“We initiate coverage on Gujarat Gas with a ‘buy’ recommendation and a DCF-based price target of Rs249, which implies a 17 per cent upside from current market price, which along with around 2 per cent dividend yield would be significantly higher than the cost of equity (12 per cent),” the brokerage said.
Cost of equity is the return a company delivers when an investment meets capital return requirements. It is the total of risk-free rate of return and the premium expected for the risk.
Reliance Securities expects the company’s earnings to grow 40 per cent CAGR through FY19-FY22 backed by industrial volume growth in piped natural gas (PNG) on strict implementation of the National Green Tribunal (NGT) order, ban on fuel oil use in Gujarat, Delhi Mumbai Industrial Corridor (DMIC) and the switch of Tarapur industrial units to PNG.
In a November 6 note, Dolat Capital maintained a ‘buy’ rating on the stock with a price target of Rs 256. It said the company would benefit from the spurt in demand for natural gas from the Morbi region and the competitive prices of liquefied natural gas (LNG) over alternate fuels.
The recent National Green Tribunal (NGT) order also bodes well for the stock. The NGT on November 14 ordered a comprehensive action plan (by January 31 by state pollution boards and a consolidated report by February 15 by Central Pollution Board) to control pollution in identified polluted industrial clusters, requiring the statutory authorities to take action by way of closure, prosecution and recovery of compensation from identified polluters.
In a December 2 note, Centrum Broking said as more than 75 per cent of Gujarat Gas volume comes from industrial and commercial segments, this order sets up multiple levers for growth.
“In its operating areas in Surat, Ankleshwar, Bharuch and Vapi, the company can theoretically recapture 1.5-1.7 mmscmd (million metric standard cubic meter per day) of volumes lost over the last few years to other petroleum fuels (FO/petcoke etc),” Centrum said.
“Newer areas like Dahej, Thane and Dadra Nagar Haveli haven’t seen much gas penetration, which can gain momentum. Given this order, we see limited approvals for any capacity expansions based on fuels other than gas, driving more migration to gas for units looking to enhance capacity,” it said.
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