Strong gains in store for gas utilities
Growing demand for cleaner fuel, expanding network important earnings drivers
Gas distribution companies are likely to see higher investor interest as bidding for natural gas distribution licenses is gathering pace. The shift to cleaner automobile, cooking and industrial fuels has already become a priority for governments. This is positive for city gas distribution (CGD) companies, such as Indraprastha Gas (IGL), Gujarat Gas and Mahanagar Gas (MGL). Even GAIL, India’s largest gas transmission and marketing company, stands to benefit as improving gas demand will result in better transmission volumes and utilisation of its pipeline infrastructure.
The Indian CGD sector is an attractive play due to growing energy consumption and the anti-pollution drive in urban India. China’s CGD achieved 15 per cent compounded annual growth in volumes in the last decade. This was led by its government’s push for clean energy, a story India was likely to replicate, said Ambit Capital.
The Indian gas utilities have been benefiting from the growing piped natural gas and automobile fuel demand (PNG and CNG, respectively). The ban on using fuel such as furnace oil and efforts to discourage the use of pet coke has been advantageous for them. Demand from fertiliser and power companies continues to be strong.
Growth reported by gas utilities during the December 2017 quarter bears testimony to the benefits. While IGL’s volumes grew by 14 per cent year on year to 5.26 mmscmd (million metric standard cubic metres per day), Gujarat Gas saw an exceptionally strong quarter, marking 19 per cent volume growth. Mahanagar Gas, too, clocked of 2.7 mmscmd, up 7 per cent, year-on-year.
IGL remained in the spotlight due to concerns over pollution in the Delhi-NCR region, which will increase the use of natural gas. For Gujarat Gas, its expanding CGD business is providing impetus to growth into industrial segment and analysts believe increasing CNG (compressed natural gas) volumes will also reduce volatility in business growth and margins. MGL should also clock better volumes as the company ramps up its business in the Raigarh region of Maharashtra.
IGL is all set to benefit from expansion in the new areas of Gurugram and Rewari. It would try to bag projects in Haryana and Uttar Pradesh, said analysts. Gujarat Gas might gain from expansion into new regions in Gujarat and Daman. Similarly, MGL is likely to bid for new regions offered in Maharashtra, especially Nashik and Aurangabad. Ambit Capital's analysts said Indian players would benefit from the network effect and credible re-investment opportunities as they scaled up their operations in nearby areas.
IGL is the top pick of most analysts and their target price indicates an upside of up to 38 per cent from current levels of ~291. The recent correction in the share price of these companies only makes the riskreward more favourable. The key risks include a sharp surge in global gas prices, which might push up domestic prices due to formula-based pricing. Similarly, a delay in issuing licences for new areas could increase the waiting period for investors.