Stocks in gas distribution sector could fire up
Some analysts are targeting price gains of 20-25% across the sector in the next 12 months
Gas Distribution is a sector that has underperformed during the bull-run. In general, the Nifty Oil & Gas Index has returned 7 per cent since May 2021, while the Nifty has returned 12.4 per cent. And between the two gas sector has been the bigger underperformer.
While there’s been activity in city gas distribution (CGD) and pipelines, volumes have been hit by low demand because of the pandemic. The future could be brighter, with volume recovery expected. Prices may also be hiked further in the second half of financial year 2021-22 (H2FY22). Demand for gas is relatively inelastic, assuming there are no further lockdowns or disruptions because of a third wave. Hence, there could be good earnings growth.
Demand is likely to continue rising for several years. Estimates suggest gas consumption across India could grow at 7-8 per cent compounded, for the next five years. This is more than double the growth rate of the past five years. It would imply large investments in infrastructure, including LNG terminals and regasification facilities for imports, and pipelines for transportation and last-mile connectivity. The distribution implies a lot of IT induction, for GIS maps, smart metering, billing and collection systems, call centres and, perhaps, sharing of last-mile connectivity for network automation with electricity distributors.
While power and fertiliser together contribute around 55 per cent of demand, growth is likely to come in several areas. There’s room for growth in domestic household use; commercial use in hotels, hospitals, restaurant and offices; transportation across 3-wheelers, buses, trucks and cars; and as a backup for power generation for smallscale industries.
Demand is likely to expand sharply for domestic usage and for transport due to easier availability in cities. This is partly due to policy encouragement. since gas is the cleanest fossil fuel. It is also a matter of economy for commuters to substitute gas for higher-priced petrol and diesel. The CGD segment may see an increase in consumption-share from 6 per cent to 11 per cent.
The policy target is a 15 per cent gas-based economy in terms of total contribution to primary energy by 2030. The Petroleum and Natural Gas Regulatory Board (PNGRB) believes this target could be exceeded with around 20 per cent primary energy penetration by 2030. Natural gas demand may grow from 242.6 mmscmd (million metric standard cubic metre) in FY13 to 746 mmscmd in FY30. Well over half of this will be imported.
In 10 bidding rounds, licences have been issued by the PNGRB for CGD in urban areas across 407 districts, covering roughly 75 per cent of the population. At the policy level, if pipelines are opened up for third-party transport and they are allowed to market CNG and PNG rather than licencees retaining exclusive rights, competition may hit margins.
Volume growth through the H2FY22 could boost top and bottom lines of companies like Adani Total Gas, Mahanagar Gas, Petronet LNG, Gujarat Gas, Gujarat State Petronet, Indraprastha Gas, and GAIL. Gujarat State Petronet is trading at a high, and Gujarat Gas has gained 40 per cent in the past three months. But the other stocks have lost ground. Some analysts are targeting price gains of 20-25 per cent across the sector in the next 12 months.