Demand may Help Gas Companies Sustain their Market Premium
ET Intelligence Group: Investor interest has been renewed in the stocks of city gas distributors (CGD) including Indraprashtra Gas (IGL) and Mahanagar Gas (MGL), thanks to the improving gas offtake, robust margins and better earnings growth in the June quarter. These stocks have gained 27-37% in the past three months. As a result, their price-earnings (PE) multiples are 15-20% higher than the long-term average. The premium valuations are likely to sustain or may even expand further with increasing volume visibility and little threat to record-high margins.
The gas volume of IGL, a supplier in Delhi region, grew by 13% to 4.34 million metric standard cubic meter per day (mmscmd), the first double digit growth in 13 quarters. Mumbaibased MGL reported 8.3% and 5.5% growth in compressed natural gas (CNG) and pipelined natural gas (PNG), respectively, in the June quarter due to more conversion of CNG vehicles and healthy addition in new home connection for PNG.
There are 4.5 lakh CNG vehicles on the road in Mumbai, while the potential market is for over 20 lakh vehicles. MGL plans to set up 80 CNG stations and lay 1,800 km of pipeline network over the next five years.Analysts expect each of the companies to deliver 6% volume growth annually in the next three years on increasing penetration and additional volumes from new regions.
Lower domestic gas price has helped IGL and MGL to maintain high operating margins.
CGDs are entitled to get higher gas allocation as their volumes increase.With no possible competition in the near and medium term, margins are expected to be high. The PE multiples of these companies are above the historical averages.
