However, there is another threat that Gujarat Energy faces in its gas for industry segment due to a change in consumption pattern. Although gas supply is no longer an issue, price does continue to be one, with propane being a possible substitute for the same.
With the market capitalization of Rs. 24,619 Crores, the shares of Gujarat Energy Ltd were trading at around Rs. 264 per share which is 33 percent discount from its 52 week high of Rs. 392 per share and is trading at a P/E of 12.6 whereas industry P/E stands at 15.2
Gas Pricing Becomes the Key Challenge
For Gujarat Energy, the key issue now is not about the availability of gas but how economically viable its use is. According to the Morbi Ceramic Association, the prices for industrial gas from Gujarat Energy have risen by 60-70% since the beginning of the war. Currently, the landed cost of natural gas is at ₹90 per scm, which is equivalent to the cost of propane at ₹91 per scm. Due to the price parity, there is no justification for the continued use of natural gas from an economic perspective.
Morbi’s Fuel Mix Signals a Shift
The purchasing trend within the Morbi ceramic manufacturers shows how fast the consumers react once other fuels start to compete economically with the traditional fuels. As at August, about 40% of the gas purchases were from Gujarat Energy, while the remaining 60% was from propane. The expectation by the association in September is for this ratio to change drastically such that about 80% will be from propane and the other 20% from Gujarat Energy.
Is Propane Becoming a Structural Threat?
The first question that comes to mind is if Morbi is just an isolated instance or if there is any larger pattern in the use of industrial gas. The increased adoption of propane would emerge as a competitive challenge if similar industrial concentrations were found to find it economically viable to replace natural gas.
However, the effect should be considered more as a displacement rather than complete withdrawal of gas from the market. This would depend on the relative prices of gas and propane, operating conditions, availability, and switching options of consumers.
Conclusion:
The major problem of Gujarat Energy would be the transition from having gas supply to being price competitive. It would become clear through the increased favoritism towards propane use by ceramic manufacturers in Morbi that industry can easily change its fuel mix depending on economic conditions. The major monitorable for investors would be whether this switch to using propane would happen only in Morbi or in other industrial companies too.