In a volatile oil scenario, city gas distribution firms still a safe bet

Lower LNG prices, strong demand and geographical expansion to drive prospects for these gas companies

City gas distribution or CGD companies like Indraprastha Gas (IGL) and Gujarat Gas, which scaled to their 52-week highs in June itself, have accrued good returns for investors. While Mahanagar Gas (MGL) may have lagged, analysts feel all three companies remain a good bet for investors.

Their confidence stems from the fact that a strong gas demand is driving volume growth, while lower liquefied natural gas (LNG) prices too, bode well for the profitability of these players. Their March quarter performance also speaks for them. While IGL led in terms of volume growth of 17 per cent, Gujarat Gas recorded a profit growth of 77 per cent.

Rising demand for compressed natural gas (CNG), used mainly by automobiles and piped natural gas (PNG), used by households and industries, coupled with expanding infrastructure as well as expansion into new geographies, all bode well for volume growth. Curbs on alternate fuels to control pollution and the need of cleaner fuels such as natural gas are aiding demand further.

Against this backdrop, analysts say that IGL is in a sweet spot to sustain the momentum. Over FY17-19, IGL, on an average, clocked volume growth of 13-14 per cent annually. Going forward, incremental demand from sustained vehicle conversion, introduction of new busses by Delhi Transport Corporation (DTC) and newly awarded geographies is lending confidence to analysts on IGL's ability to maintain its growth trajectory. While the National Capital Region (NCR)-based company has been expanding in areas of Rewari, Karnal (in Haryana) and Gurugram over past two years, it has won licenses to expand in Muzzafarnagar (Bihar), Meerut, Shamli (Uttar Pradesh or UP) during the 9th round of bidding, and Kaithal (Haryana), Ajmer, Pali and Rajmasand in Rajasthan and Kanpur, Fatehpur (UP) and Hamirpur in Himachal Pradesh during the 10th round of bidding. In addition, a favourable judiciary and heightened environmental concerns in Delhi-NCR are incremental enablers, say analysts at Antique Stock Broking.

Gujarat Gas, which remains suitably placed to benefit from rising industrial growth, would also see its prospects brighten from city gas distribution. In the industrial sector, a strong demand for gas from Morbi cluster is looked at with optimism post National Green Tribunal (NGT) ban on coal gasifiers.

The company has also been developing 11-12 new districts over the last few years. And, in addition to the 7 new licence areas won in rounds 9 and 10, the company is expected to retain its position as India’s largest CGD player over the next 5-7 years, say analysts. Centrum Broking estimates of area potential suggest that Gujarat Gas’ overall volumes can grow by over two times by FY25 to 14.1 mmscmd (million metric standard cubic meter per day) from current 6.5 mmscmd, translating into a growth rate of 14 per cent per annum. However, some other analysts believe the company can beat expectations. Analysts at Jefferies say that if Morbi volumes stay at current levels of 4.5 mmscmd, then there could be an upside of 12 per cent to their volume and EBITDA estimates for Gujarat Gas for FY20. The infrastructure, which is currently being laid out, could solve the supply issue and unlock higher demand. Consequently, volumes from Morbi itself could potentially touch 6 mmscmd as unorganised industrial players may also opt to shift to piped natural gas, say analysts.

The Street’s confidence on MGL may have been soft recently as compared to other CGD players, but volume growth prospects remain strong for the company. The gas pipeline infrastructure and expanding operations in Mumbai, as well as, in adjoining areas and Raigad district, will enable MGL to capture benefits of the large and growing market in the state of Maharashtra, given the low penetration, say experts. The company’s margins are also set to improve from the current quarter on account of recent price hikes, thus improving the margin outlook. Analysts at ICICI Securities estimate MCL’s gross margins at Rs 13.5 per scm (standard cubic meter) for both FY20 and FY21, as compared to Rs 13.2 per scm in the March quarter. Though the overhang of stake sale by BG group (subsidiary of Netherlands-based energy and petrochemical company) of its remaining 10 per cent holding continue, stock valuations remain attractive.