Ruchi Agrawal Moneycontrol Research
Strong volume growth led to a decent showing by Indraprastha Gas (IGL) and GAIL India (GAIL) during Q1 FY19. While both companies reported strong volume and topline growth, IGL saw slight margin pressure with changing product mix.
GAIL India: Result snapshot
After a disappointing performance in Q4 FY18, GAIL’s gas marketing and petrochemical segments reported a strong Q1, driving the 52 percent year-on-year (YoY) topline growth. The segments benefited from low-cost US LNG during Q1, improving volumes. Gas transmission revenue increased 3 percent on the back of a volume uptick.
The rising trend in crude prices bodes well as it makes US LNG contracts profitable. A unified tariff system could boost gas transmission realisations for the company going forward. The city gas distribution (CGD) business is positioned for growth across regions and could drive profitability for the company.
IGL: Earnings at a glance
Rising PNG and industrial segment volumes aided the 13 percent volume growth for IGL, driving the 24 percent YoY growth in topline. Despite adequate price hikes, the company saw slow margin growth due to changing product mix. A major portion of the volume growth has been accruing from industrial consumers, which has altered the product mix in the last few quarters. With inherently lower margin in the industrial segment, overall margins saw some pressure. This impact was being offset by other one-off incomes in past quarters.
While CNG conversion is seeing immense growth due to policy support, we see gradual slowdown in the growth rate of CNG vehicle conversion. This could slow down volume growth in the CNG segment. This would lead to a further alteration of the product mix in coming quarters.
Sector trends
Unified gas tariff to benefit sector companies The Petroleum and Natural Gas Regulatory Board (PNGRB) is considering a unified tariff plan for the usage of GAIL’s gas pipeline network. Implementation of the same will provide a significant improvement in performance.
While it is believed that the unified gas tariff might result in a hike in the gas bill for consumers, implementation of a unified gas tariff would bring in procurement freedom for gas marketing companies and benefit the company by reducing overall gas procurement costs. It stands to be a positive for both GAIL and other downstream players.
Crude oil sustaining at higher levels Global crude oil prices have more or less sustained at higher levels in the last few months. With rising crude prices, natural gas becomes a cheaper and a more attractive fuel option. This was one reason that led to a substantial uptick in volumes during the quarter gone by. The same is expected to continue in coming months.
Policy support and large scale CGD expansion
With growing environmental concerns, there has been immense policy support to promote use of a relatively cleaner fuel like natural gas. PNGRB, in the latest round of CGD auction, has put 86 geographical areas for bidding. This large scale expansion is expected to augment future volume growth.
Price hikes to protect margin Increasing input cost, coupled with inability to undertake price hikes, ate away margin of gas marketing companies in past quarters. However, adequate price hikes have been taken by all companies in the last two quarters. This should help in protecting margin. Moreover, it reinstates our belief about the ability of companies to pass on higher costs.
Outlook The sector is currently positioned for numerous macro tailwinds, which would facilitate rapid growth in the future. Swift uptick in crude prices has made gas an attractive, cheaper alternative, which brings in more conversions in commercial and domestic segments and higher volumes. Increased environmental concerns and policy support have promoted CNG (being a cleaner fuel) and we expect this trend to continue. With aggressive expansion of the city gas distribution network, we see immense volume growth.
Valuation snapshot
The stock prices of IGL and GAIL have corrected 4 and 17 percent, respectively, from their 52-week high and are trading at reasonable valuations. We find both stocks fundamentally sound and stay convinced with their growth story. While valuations for GAIL are attractive, we would recommend that investors keep IGL on their radar for a better entry point. Alterations in IGLs product mix would be something to watch out for.
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