Multiple factors in favour of gas utility companies

Rupee appreciation and lower gas prices driving profitability

After posting a strong quarterly performance, Indraprastha Gas (IGL), Gujarat Gas and Mahanagar Gas are well-placed to clock robust growth in the coming years. While low gas prices are supporting demand, together with rupee appreciation, the two factors are propping up margins. With companies continuing to expand distribution, it is fuelling top line growth.

Gujarat Gas posted a strong 19 per cent growth year-on-year (y-o-y) in volumes in the June quarter (Q1), which analysts attribute to better economics for gas usage versus coal/fuel oil for the Morbi-based ceramic makers, and revival in demand from chemical plants in the Vapi-Valsad-Ankleshwar region. Gujarat Gas is expected to continue benefitting from this favourable gas economics, due to which Sharekhan’s analysts believe volumes will post a 15 per cent compounded annual growth rate (CAGR) over FY17-19. This for a gas utility is excellent by any measure. Expansion of the gas distribution network across new areas in Gujarat, Dadra and Nagar Haveli, Thane and Palghar (Maharashtra) should generate 5-6 mscmd (million standard cubic meters per day) of volumes over the next four-five years.

Likewise, the ban on fuel oil in Gujarat should drive volumes by around 1.6 mscmd over the next two-three years, something that analysts are yet to factor in their estimates. IGL, on the other hand, is already benefitting from the fuel oil ban in Delhi-National Capital Region (NCR). Recently, it also got permission to expand the city gas distribution network in Gurugram. Although the permission covers only a fourth of Gurugram, more permissions are seen coming through, which will boost IGL’s prospects. In Q1, IGL’s total volumes grew 13 per cent y-o-y to 4.90 mscmd. Analysts at Motilal Oswal Securities model FY18 and FY19 volume growth at 12 and 11 per cent, respectively.

Profitability, as measured by earnings before interest, tax, depreciation and amortisation (Ebitda) per standard cubic meter (scm) of gas, is also improving, aided by better exchange rate, lower spot LNG prices and firm selling prices. For Gujarat Gas, better gas sourcing arrangements and stable LNG prices should lead to higher gross margins in FY18 and FY19, believe ICICI Securities’ analysts. IGL is expected to post Ebitda per standard cubic metre (scm) at Rs 6. Analysts at IIFL retain their forecast of 14 per cent per annum earnings growth for IGL, backed by higher volumes and firm margins.

For Mahanagar Gas, it’s volume growth might have been a bit slower at three per cent y-o-y in Q1, but its Ebitda per scm at Rs 8.7 (up 30 per cent y-o-y and 26 per cent sequentially) is the best of the three, and was aided by a stronger rupee, lower gas prices and better CNG sales mix.

Analysts at Edelweiss have revised upwards their FY18 and FY19 earnings by two-four per cent, factoring in lower volume growth, offset by better margins. They estimate 14 per cent CAGR in net profit and robust return on equity of above 20 per cent over FY17-20.