Higher volumes, margins to fuel growth for gas-distribution firms

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The Gujarat Gas stock surged over 7 per cent and scaled its all-time high on Wednesday. 

At the same time, the stock of Indraprastha Gas (IGL) is also close to its peak, while that of Mahanagar Gas (MGL) is trading at around its 22-month high.

The Street’s confidence on city gas distributors (CGD) remains high, considering the firm demand for gas, rising volumes, and future growth potential. 

All three companies have received upgrades by foreign brokerages. 

With lower natural gas prices (global prices down over 20 per cent in two months), their profitability, too, will continue to improve. 

The CGD companies have already outperformed their upstream and downstream oil and gas peers, driven by strong volume-led earnings growth, and margin expansion during the September quarter (Q2). 

The CGD companies saw improvement in margins of 153-460 basis points in the September quarter year-on-year, while volumes grew up to 40 per cent year-on-year, with Gujarat Gas leading the pack. Not surprising then, that their profits rose 25-125 per cent year-on-year in Q2. 

The forward outlook remains strong, say analysts. Volume growth is expected to be healthy, led by increased availability of natural gas, as well as rising demand for CNG (compressed natural gas) by automobiles, PNG (piped natural gas) for household and industrial use, more so in the back of pollution control measures. 

The government, too, aims to increase the share of gas in India’s energy mix to 20 per cent by 2025 from the 6 per cent at present, which — along with the thrust to promote use of natural gas to reduce pollution — provides strong volume growth opportunity for the three listed CGD companies. 

This, coupled with the allocation of cheap domestic gas (for CNG and domestic PNG use) and low LNG prices, will help CGD companies to sustain high Ebitda margins, says Abhijeet Bora of Sharekhan.

IGL, led by growth in the national capital region (NCR), use of CNG for inter-city travel, increased conversion to CNG on account of BS-VI implementation, and contribution from newer geographies, is seen reporting good growth, which analysts at Motilal Oswal peg at 10-11 per cent. 

The higher volume growth for Gujarat Gas is seen driven by strong industrial sector demand and supplies. For FY20 and FY21, analysts at IIFL expect Gujarat Gas to register 44 and 15 per cent year-on-year volume growth. 

This is due to sustained off-take from the Morbi cluster (given the ban on coal usage); growth in sales to other smaller industrial units upon expnasion of its network and higher off-take from existing players; and stable growth in CNG and domestic PNG sales.

Though MGL may not have won new geographical areas, the management has, nevertheless, guided for 5-6 per cent volume growth. 

Rising CNG and PNG demand in Mumbai and pipeline expansions in Maharashtra are likely to drive growth. For MGL, the overhang of stake sale is also over with Shell India having already sold its stake. 

As volume growth remains firm, the soft natural gas prices continue driving operating performance and profits for these companies. Foreign brokerages have also upgraded earnings for Gujarat Gas by 13-15 per cent and for MGL by 7-11 per cent for FY20 and FY21. 

IGL, too, is amongst top mid-cap picks of some foreign brokerages.

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