Gas distribution sector stocks could fire up amid likely volume recovery

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. Within, O&G, the gas sector has been an underperformer.

While there’s been activity in city gas distribution (CGD) and pipelines, volumes have been hit by low activity due to the pandemic. The future could be brighter, with volume recovery expected. Prices may also be hiked further in the Second Half of 2021-22. Demand for gas is relatively inelastic, assuming no further lockdowns or disruptions by a Third Wave. Hence, there could be good earnings growth as well.

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 as well as for last mile connectivity. The distribution implies a lot of IT induction, for GIS maps, smart metering & billing & 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 small-scale 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, diesel. The CGD segment may see an increase in gas 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 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 Meter) in 2012-13 to 746 MMSCMD in 2029-30. Well over half of this will be imported. (Just over 50 per cent is currently imported).

In ten bidding rounds, licenses have been issued by the PNGRB for city gas distribution in urban areas across 407 districts covering roughly 75 per cent of population. At policy level, if pipelines are opened up for third-party transport and third-parties are allowed to market CNG and PNG rather than licensees retaining exclusive rights, competition may hit margins. For instance, the Oil Marketing PSUs may enter the game directly – they are already present via JVs.

Volume growth through the second half of 2021-22 could boost toplines and bottomlines 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.