Besides volume ramp-up, profitability to remain healthy for GAIL, IGL

The latest round of bidding for city gas distribution (CGD) licenses covering 50 new geographical areas was pretty aggressive, which saw incumbents such as Indraprastha Gas (IGL) and Gujarat Gas win only a few areas, while Mahanagar Gas (MGL) did not get even a single new area. However, analysts see a silver lining in this.

Those at Edelweiss Securities say these CGD firms have remained selective in bidding, and believe that incumbents have focused on maintaining current levels of return on capital employed (RoCE), which led to them being outbid by new aggressive entrants.

The optimism also stems from the outlook for volume growth of the companies. Given the strategic nature of the 20 geographical areas won by GAIL, IGL and Gujarat Gas that complement their infrastructure presence, these players could see significant volume ramp-up over the next 3 years, say analysts at BOB Capital.

For instance, Gujarat Gas has won six areas across Haryana, Madhya Pradesh, Punjab and Rajasthan, where the presence of gas pipeline infrastructure belonging to its parent — Gujarat State Petronet — can be monetised.

Similarly, for IGL, the three new license areas bagged across Haryana, Rajasthan and Uttar Pradesh (around Kanpur) are an extension of its existing NCR (National Capital Region) and Kanpur (CUPGL JV) grids, therefore making the new areas a good strategic fit.

Further, the government’s sustained thrust on boosting gas consumption and achieving its target (gas accounts for 15 per cent of the energy mix) should also drive volumes.

IGL remains in a sweet spot catering to the NCR, which is seeing a strong focus on curbing pollution and shifting to cleaner fuels. Gujarat Gas, too, continues benefitting from industrial demand, besides an expanding network. Analysts at Jefferies, thus, have maintained a positive view on the company.

The government’s sustained thrust on boosting gas consumption also allays concerns over bringing administered prices of gas at parity with imports. Administered price of domestic gas is typically lower than the price of imported gas. Gas is an input for CGD companies. So, apart from the faster volume ramp-up for these companies, profitability is also likely to remain healthy.

Among stocks, Edelweiss remains positive on IGL, MGL and Gujarat Gas, in order of preference. Further, while GAIL has won a few CGD areas, the overall expanding gas distribution and consumption in the country bodes well for GAIL’s gas pipeline business, which will remain the ultimate beneficiary of rising transmission and trading volumes.