Allocation of new GAs in the 10th round of CGD bidding will be an additional growth driver for the future.
The performance of downstream gas companies has been on an uptrend with an improvement in volumes both in the domestic as well as industrial segment. Price hikes by the companies have helped them in keeping the margins more or less intact. Going forward, we stay positive on the overall growth story of the sector.
Of the sector companies we prefer Indraprastha Gas Ltd (IGL) given its track record of strong growth and decent pricing power which the company enjoys owing to policy support in areas of operation. We recommend to keep this company on the radar and accumulate the stock in a staggered manner.
Update on sector movements
NITI Aayog recommendation – NITI Aayog recently recommended the withdrawal of concessional domestic gas for the CNG segment and direct subsidy only for the piped gas users through the direct benefit transfer mechanism (DBT). The CNG segment is currently being allocated the low cost domestic gas, and switch to imported LNG would mean an uptick in costs. While the market- price based gas would still be cheaper than other auto fuels. But with a relatively lower differential between the price of gas and other auto fuels post such an implementation, we expect the conversion proposition to be less lucrative for vehicle owners. This might be an overhang for the stock, however implementation still remains questionable.
CGD bidding round – The results for the 10th round of the CGD bidding were announced recently. A total of 12 companies have grabbed 50 GAs (124 districts) from a total 225 bids received. This latest allocation plans to add 2,02,92,760 domestic PNG (piped natural gas) connections and 3,578 CNG (compressed natural gas) stations for transport sector by March 31, 2029. Almost 70 per cent of India’s population (from the current 50 percent) and 53 per cent of its geographical area would be covered under the CGD system post this allocation. Allocation of complementing geographies stands as a positive for the downstream gas companies and would facilitate higher utilization of the existing infrastructure
International gas price trends – The price of crude oil has remained volatile in the bearish range in the past few months, the price of natural gas is showing similar trends. Post some weakness in price in the global markets, the prices seem to be gaining strength now. The price of the Indian natural gas price is based on the average of gas prices at 4 major international hubs namely US-based Henry Hub, Canada-based Alberta gas, the UK-based NBP, and Russian gas. The revision in the gas price on April 1 would be something to watch out for.
Update on the gas trading hub proposal – In 2017 India announced plans to set up a gas trading hub to sell the fuel at market-determined prices as it looks to move away from polluted alternatives. However the implementation involves advanced infrastructure such as pipeline networks, regasification and storage capacities due to administrative, operational and legal issues. Although west and north India have pipeline infrastructure, it’s inadequate in east and south India. Due to this the actual implementation does not seem visible anytime soon.
Commission to OMCs - There has been a hike in the trade commissions charged by the oil marketing companies (OMCs) in the past few months. Downstream gas companies expect the rise (8-9 percent per year) to continue in the coming year given inflation and wage costs expenses by OMCs. However there has been a recent momentum in the dodo model (dealer owned, dealer operated) and upcoming growth is expected to flow from this model.
Q3 performance of companies
Indraprastha Gas Ltd (IGL) reported another quarter of better than expected performance with strong growth in revenue and profits driven by a healthy 12.2 percent year-on-year (YoY) volume growth and a 13.6 percent YoY increase in realisation. Growth in CNG volumes remained strong at 13.1 percent YoY. Domestic PNG volumes were healthy with a 10 percent YoY uptick. Within PNG segment, the industrial and commercial volumes were up 13 percent YoY.
Mahanagar Gas (MGL) reported a strong 30 percent yoy uptick in profits led by improved volumes in the LNG segment and price upticks during the quarter. Volumes saw an above average growth of 8 percent yoy with Domestic PNG volumes up 13 percent yoy, CNG up 8 percent yoy and Industrial plus commercial up 2.5 percent yoy.
Gujarat Gas (GG) reported a very strong performance driven largely by an uptick in per unit margins, even though the volumes growth remained muted. Overall volumes grew at 4.3 percent YoY with industrial segment volume decelerating to 2.5 percent YoY due to sharp rise in LNG prices in 3QFY19. PNG domestic segment volumes rose 4.2 percent YoY, while PNG commercial volume grew 10 percent YoY. CNG volumes increased 10.1 percent YoY.
We expect the good performance to continue with rising demand and deeper penetration in existing geographies. We also expect the volume growth to remain healthy. Allocation of new GAs in the 10th round of CGD bidding will be an additional growth driver for the future.
There is some scepticism related to limited pricing power in coming months, given the upcoming general elections. With a substantial differential between the price of mainstream auto fuels and CNG, we expect the companies are in a position to pass on prices and the healthy growth in volumes would continue in the coming quarters.
With the fundamental growth story intact, and a sector outlook positive, we believe in a healthy long-term growth.Moneycontrol Research Page.