Better consumption brightens growth prospects of gas utility companies

Fertiliser and city gas segments set to fuel growth; power demand may revive soon

The recent figures on consumption indicate better growth prospects for gas utility companies such as GAIL, Indraprastha Gas and Petronet LNG, among others, in the near term.

Though power demand remained subdued, two sectors, city gas distribution (CGD) and fertilisers, are fuelling growth in consumption of gas.

According the Petroleum Planning and Analysis Cell, consumption of natural gas rose by over 5 per cent year-on-year in November 2019 and by 3.2 per cent in FY20 so far. 

The growth was contributed by fertiliser and city gas segments, which saw a rise of 20-25 per cent. They accounted for about half the total natural gas consumption in the country, respectively.

Going ahead, gas consumption is expected to improve. According to analysts at Axis Capital, gas consumption is estimated to rise 4 per cent and 5 per cent in FY20 and FY21, respectively. This will be after growing penetration of city gas, completion of some projects such as the Kochi-Mangaluru pipeline, and higher utilisation of fertiliser as well as downstream oil & gas plants. 

In FY19, consumption of natural gas was up by about 3 per cent. Among user industries, higher gas offtake was due to an uptick in fertiliser consumption in the December quarter. This was because of increased rabi sowing, healthy reservoir levels and better crop prices. 

Analysts expect demand from the power sector to revive in FY21 on the back of government policies.

Moreover, lower prices of domestic gas with realignment of prices from the Panna-Mukta-Tapi fields and cheaper spot LNG (liquefied natural gas) are expected to improve profitability, mainly of city gas distributors. 

CGD companies source around 15 per cent of their gas requirement from Panna-Mukta-Tapi. However, some analysts are sceptical of volume and profitability improvement of distributors in the medium to long term amid fear of rising competition in the CGD space. 

Thus, how the existing CGD companies protect their overall business would be the key monitorable.

For now, GAIL and Petronet LNG are preferred picks of analysts in the gas segment.