Gujarat Gas least vulnerable among city gas players to competition

Subdued gas prices will benefit IGL and MGL too, the two companies that have seen their share prices correct on fears of rising competition

Worries over regulatory risks has seen shares of city gas distribution utilities such as Mahanagar Gas Ltd (MGL) and Indraprastha Gas Ltd (IGL) correction in the recent past. The regulator, Petroleum and Natural Gas Regulatory Board (PNGRB) is expected to allow competition for city gas distribution (CGD) in Delhi, Mumbai, Thane and some other geographies, where marketing exclusivity of incumbents has already expired. While IGL shares have fallen by more than 17 per cent, Mahanagar Gas has corrected by 13 per cent. Gujarat Gas Ltd, however, continues trading firm.

Analysts say, MGL is most vulnerable and is likely to face more competition compared to its peers, as it has maximum exposure to the city gas distribution business. IGL also has significant exposure, however it is better placed as it has been expanding to newer geographies where its marketing exclusivity will be maintained. Though IGL has corrected more than MGL, it is also due to the steep valuations it had been trading at.

Gujarata Gas, on the other hand, is least impacted having significant supplies to industrial sector. Replacement of polluting industrial fuel will further drive volume growth for Gujarat Gas, say analysts at Motilal Oswal Financial Services, who have maintained buy ratings. Further, both IGL and Gujarat Gas have also won new geographical areas in bidding for city gas distribution while MGL has not won any new geography. Analysts at ICICI Securities said that Mahanagar Gas will see the biggest fall in EBITDA margin while their concerns on IGL were led by the stock's expensive valuations. Not surprising, IGL has corrected most.

Post the correction, analysts feel the stocks are factoring in concerns despite the companies expected to continue benefitting from strong fundamentals. While spot prices of LNG having more than halved to a decadal low of less than $3 per million metric British Thermal unit (mmBtu) in February 2020, there is an oversupply of gas. The coronavirus outbreak has only aggravated the situation. However, it bodes well for all CGD players, at it spurs demand for the cheaper fuel besides improving their profitability.

Says Manish Gupta, Senior Director, CRISIL Ratings, “At a Brent crude price of $55 per barrel, the landed cost of furnace oil would be about $12 per mmBtu (million British Thermal Units), while industrial LPG will be about $16 per mmBtu. On the other hand, industrial piped natural gas, apart from being cleaner, is significantly cheaper at $10.5 per mmBtu.”

Clearly the competitiveness of gas is to continue driving demand as also pollution control measures. The benefits are also likely to sustain as gas prices are to remain subdued for longer, as liquefication capacity of about 180 million tonne (equal to 40 per cent of current world capacity) is set to be commissioned over the next 4-5 years and domestically, regasification capacity, too, is expected to witness robust growth, outpacing LNG demand.

Even compressed natural Gas (CNG) demand is expected to continue growing led by rising demand for cleaner fuels on the back of pollution control measures and BS VI implementation.

As established city gas distributors such as IGL, Gujarat Gas and MGL benefit, the news is also good for new players like Adani Gas, Torrent Gas and others who have bid for newer geographies. However new incumbents will have to first set up basic infrastructure and hence, benefits will accrue overtime. 

Overall, it will be benefit GAIL too, as higher gas demand from city gas distributors and increased geographical presence will boost volumes from India's largest pipeline network company, driving its revenues and profits.

In addition to gas players, the benefits will be seen by user industries. As lower gas costs may benefit power producers, the fertiliser plants using gas as feedstock will also benefit. Likewise, the tile producers also stand to gain. While the coronavirus is hurting exports to China, in the long-run the consolidation and shift of market share to organised players also bodes well for the domestic tile industry.