Brokerages cautious about city gas distribution companies

The Indian gas sector has faced geopolitical challenges due to the fears of supply disruptions amid the ongoing West Asian conflict. This has pushed up LNG prices. The sector is also facing increasing competition from electric vehicles (EVS) that cut into demand for CNG vehicles. However, CNG is still more costeffective than petrol or diesel, and EVS have not gained enough penetration yet. Domestic cooking use demand is stable.

Here’s a round-up of Q4 results from some of the majors in the gas sector. Indraprastha Gas (IGL) declared Q4FY24 results where operating profit and net profit of ~520 crore and ~380 crore, respectively, missed estimates due to lower realisation affecting gross margins, and due to higher operating expenses (opex). Volumes were in-line, at 8.7 million metric standard cubic meter per day (mmscmd), up 6 per cent year-on-year (Y-O-Y) and 3 per cent quarter-on-quarter (QO-Q). There was a sequential decline of 8 per cent Q-O-Q in operating profit/scm and sequential operating profit and net profit declined 6.3 per cent and 8.9 per cent, respectively.

The management guided for 4-5 per cent Y-O-Y volume growth for Delhi. The Delhi Transport Corporation targets 100 per cent conversion of buses to EVS by CY25, but trucks, and inter-state buses could support new Gas volumes.

The capex would be ~1,700-1,800 crore per annum. The EV factor has led some analysts to suggest “reduce”.

Gujarat Gas (GGL) reported a small 2-3 per cent miss on Q4FY24 operating profit and adjusted net profit at ~590 crore and ~370 crore, respectively due to a 5 per cent miss in volumes at 9.7mmscmd (up 6 per cent Q-O-Q but below expectations). Morbi volume (which is mainly industrial) rose 5 per cent Q-O-Q to 3.8mmscmd. The management guidance is of FY25 volume growth of 10 per cent and operating profit/scm of ~4.5-5.5. GGL highlighted focus on industrial volume stability. The uncertain propane-png outlook, volatile margins, and expensive valuations compared to peers could be downside risks.

Mahanagar Gas (MGL) reported a Q4FY24 operating profit of ~390 crore which was below consensus due to a decline in margins while sales volume was a little better than expected. Net profit was also lower than consensus at ~270 crore. Operating profit margin declined to ~11.5 /scm in Q4FY24 vs ~13.3/scm in Q3FY24 due to a jump in opex which may be due to one-off costs.

MGL’S overall sales volume in Q4FY24 was 1.3 per cent above consensus at 3.78 mmscmd due to higher PNG volume, though CNG volume was lower than expected. MGL has some pricing power since CNG is cheaper than petrol and diesel.

Volume growth may also be possible since CNG penetration in private cars in Mumbai is only 25-30 per cent.

Gujarat State Petronet's Q4FY24 operating profit was in line with estimates at ~380 crore, led by a higher transmission volume of 33.4mmscmd. The spot LNG price is currently $10.5/mmbtu (metric million British thermal units), down from $12.6/mmbtu in H2FY24, which is an upside. Moreover, the company holds a significant stake in Gujarat Gas which could be worth around ~265/ share even with a holding company discount.

Overall, analysts seem to be cautious about the sector due to the global risks, while industrial demand is highly sensitive to price rises, and the looming competition from electric vehicles.