HDFC Securities recommendation on Gujarat Gas (GGL) is premised on volume growth of 17% CAGR over FY21-23E, portfolio of mature, semi-mature and new geographical areas and compelling valuations, given superior return ratios among the city gas distribution players. 3QFY21 EBITDA/APAT was 27/40% above our estimates owing to, higher-than-expected per unit gross margin, 16% higher-than- anticipated volumes at 11.45mmscmd, lower-than-anticipated depreciation and finance cost, offset by a higher-than-expected tax outgo.

Volumes: Blended volume stood at 11.45mmscmd (HSIE 9.90), pushed by strong industrial demand (9.16mmscmd or 80% of volume mix). CNG/Domestic PNG/Commercial PNG volumes stood at 1.54/0.64/0.10mmscmd in 3Q vs 1.28/0.64/0.07mmscmd in 2Q. Volumes were at a record high in 3Q, the highest-ever in a quarter in the past five years. The company's gas sales volume has shown a robust recovery post lockdown.

Margin: Per unit gross spread expanded by INR 1.25 YoY to INR 7.8/scm. This is attributable to part retention of the benefit of falling RMC. Per unit EBITDA came to INR 5.8/scm (vs. INR 4.3/8.1 per scm in 3QFY20/2QFY21). However, we believe that these margins are not sustainable, and expect them to correct from the current levels in the future. For FY21/22E, we are factoring in a per unit EBITDA margin of INR 5.1/5.1/scm.

Change in estimates: HDFC Securities raises its FY21/22E EPS estimate by 17.1/8.0% each to INR 18.8/20.1 to factor in better-than-expected volumes and the overall performance in 9MFY21.