PET COKE PUTS GAS FIRMS IN ASWEET SPOT
Indraprastha Gas, GAIL and Petronet LNG are the main beneficiaries
With judicial action increasingly becoming negative on the use of pet coke, higher demand from industrial users should benefit gas companies. Industrial usage is expected to increase further with furnace oil and pet coke bans in the National Capital Region (NCR), Rajasthan, Uttar Pradesh and Haryana. The industries are to shift to alternative fuels, including natural gas, to fulfil their energy requirements. A CARE Ratings report already suggests the petroleum ministry has directed oil and gas public sector undertakings for increased supply of gas and alternative fuels to affected parts. Increasing supplies of lower-priced gas, coupled with improved demand, are positive triggers for companies such as Indraprastha Gas, Gujarat Gas and Mahanagar Gas.
Though larger industries such as cement may shift to coal and many others have capabilities to use coal gasifiers, there are others that will still have to resort to gas usage. Ambit Capital says a 10 per cent shift of pet coke use to natural gas (coming from small scale industries such as dyeing units, paper mills, brick kilns etc.) would create demand of 5 mmscmd (million metric standard cubic metre per day).
Among gas distribution companies, Indraprastha Gas (IGL) can see major benefits accrue, given its significant presence in NCR. The company is already witnessing strong volume growth (14 per cent in the September quarter) driven by city gas (piped, compressed); the distribution business can see further boost from industrial demand. Ambit says a ban on diesel gensets in NCR can create demand for 0.8-1.0 mmscmd for IGL. The opportunities are robust looking at reported volumes of close to 5 mmscmd by IGL. The company can capture volumes from NCR-based power plants too which have been using pet coke, analysts say.
Antique Stock Broking remains bullish on IGL’s growth potential, given heightened environmental concerns in NCR, latent demand potential in recently added (to its gas network) Rewari and Gurugram areas, subsidiaries registering healthy growth and high likelihood of adding Karnal and Faridabad to its portfolio.
The benefits may accrue to others such as Gujarat Gas and Mahanagar Gas too. Gujarat Gas, having presence in Gujarat, and Mahanagar Gas in Mumbai and Maharashtra, can see benefits as user industries proactively shift to other energy sources from pet coke. Now, there are risks that pet coke imports may be banned completely and usage bans can be extended to other states as well.
City gas distribution (CGD) companies also benefit from rising crude prices with improving gas economics as compared to fuel oil due to a sharp rise in the latter’s prices, say analysts. India Ratings believes CGD entities will continue to benefit from a favourable industry structure which has resulted in a strong business and financial profile. On competition coming from oil marketing companies (OMCs), India Ratings does not see a threat to the business models of CGD players as most OMCs are already present in the CGD business through joint ventures and have exhibited a collaborative, rather than competitive, behaviour. Further, the CGD business for an OMC constitutes a minuscule percentage of its revenues and capex, the CNG business does not change the profitability profile for OMCs and hence the incentive for them to look at marketing in the existing geographies is limited, says India Ratings.
Meanwhile the improving gas demand will boost prospects of GAIL as it increases the utilisation of its pipeline and marketing margins. Petronet LNG, that receives and regasifies imported gas, too, should benefit. For GAIL, the natural gas pipeline and marketing margins contribute about 60 per cent to its operating profit. The company is already benefitting from improving petrochemicals profitability and the LPG segment’s prospects have improved further, with better realisations. Not surprising that the stock, trading at ~466.45, is near its all-time high of ~480.