Recommendation From Miscellaneous Sector

Recommendation From Miscellaneous Sector

This section gives a recommendation of a stock having stock price below Rs 100 with sound fundamentals and expected to give handsome returns over a one-year time horizon.

ADANI GAS : IN THE RIGHT SPACE AT THE RIGHT TIME

HERE IS WHY
☛Good growth potential.
☛Significant improvement in financials.
☛Strong financial ratios.

Adani Gas Limited is engaged in developing city gas distribution (CGD) networks to supply piped natural gas (PNG) to the industrial, commercial, domestic (residential) segments and compressed natural gas (CNG) to the transport sector. The company has already set up city gas distribution networks in Ahmedabad and Vadodara in Gujarat, Faridabad in Haryana and Khurja in Uttar Pradesh.

At present, natural gas accounts for just about 6 per cent in the total energy mix of the country due to its low per capita consumption. The government is aiming to increase this share and wants to take it to 15 per cent by 2030. Even without increase in total energy consumption as a nation, this can translate into 150 per cent increase in revenue for natural gas players. Moreover, with favourable government policies and reforms, the per capita consumption of natural gas is expected to also rise. Simultaneously, the population of India is expected to grow to 1.44 billion by 2024, thereby aiding increased demand for energy. Hence, the demand side will be strong. There is a growing preference for natural gas for its convenience, safety and cost-effective properties.

The infusion by TOTAL Group for 37.4 per cent equity stake in AGL is the largest foreign direct investment in India’s city gas distribution sector. This investment aims at strengthening infrastructure across the supply chain. It will also result in access to global expertise and supply network, which will help in better gas sourcing. Investment by TOTAL Group helps give the growth story of India’s natural gas company a kind of validation.

The city gas distribution business is still an untapped market with a lot of potential to grow. This makes it a unique space with good growth prospects and at a profitable level with good ROCE and profit margins, as can be seen from the past three years’ performance.

For the quarter ended March 2020, the company’s gross sales decreased by 0.78 per cent to Rs 490.32 crore in Q4FY20 from Rs 494.17 crore in Q4FY19. Total expenditure for Q4FY20 stood at Rs 322.37 crore as against Rs 354.58 crore in Q4FY19, showing a decrease of 9.08 per cent. Thereby, PBIDT, excluding other income, showed an increase of 20.32 per cent to Rs 167.95 crore in Q4FY20 from Rs 139.59 crore in the same quarter last year. PBIDT margin, excluding other income, for Q4FY20 stood at 34.25 per cent as against 28.25 per cent in the same quarter last year.

PAT for Q4FY20 stood at Rs 122.07 crore as against Rs 75.68 crore in the same quarter last year, showing a significant increase of 61.3 per cent. PAT margin for Q4FY20 stood at 24.90 per cent as against 15.31 per cent in the same quarter last year. The stock is trading at a PE multiple of 36x. ROCE for FY20 stood at 36.54 per cent whereas the RONW for the same period stood at 33.91 per cent. The company has shown increase in sales and profit over the last three years along with margin improvements (PBIDTM and PATM). By virtue of these factors, we recommend our reader-investors to BUY this stock.

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