Gas utilities in a sweet spot
Indraprastha Gas is expected to see stronger gains, as compared to Mahanagar Gas, say analysts
The domestic gas prices have been cut marginally from $2.5 per mmbtu (million British Thermal Units) to $2.48 per mmbtu, but gas distribution and marketing companies are in a sweet spot. Price is one among a few other triggers, which could lead to more gains in the stock price of these companies such as Indraprastha Gas, Gujarat Gas and Mahanagar Gas and even GAIL.
To begin with, unlike expectations that government will hike prices of gas to ensure that gas exploration and production remains viable, the price has been lowered further, albeit marginally. Continued low gas prices will benefit users of domestic gas such as city gas distribution companies — Indraprastha Gas and Mahanagar Gas, as well as GAIL’s LPG business, say analysts at Jefferies.
The other triggers to drive earnings are improving industrial demand and an appreciating rupee. K Ravichandran Vice-President and Group Head, Corporate Ratings, ICRA, says that for the city gas distribution sector, while the reduction in gas price is minuscule when coupled with the exchange rate impact, input cost has undergone a reduction. The reduction in input costs bodes well for the margins of the companies.
Growing industrial demand is benefitting companies further. Lower gas prices as compared to fuel oil is now driving growth. Moving forward, analysts see a glut in LNG supply, which will help in keeping gas prices low. Upgradation of facilities by domestic refineries will also lower fuel oil supply by 24 per cent to 7.2 million tonnes (MT) by FY18 from 8.9 MT in FY16, say analysts at Elara capital. The analysts estimate fuel oil to move from an average of 94 per cent surplus position (over demand) during FY11-16, to 42 per cent deficit by FY20. Thus, expect gas volumes to benefit from this in the coming years.
Indraprastha Gas being a city gas supplier in National Capital Region (NCR) will also benefit from a ban on fuel oils and pet coke usage in the NCR. A large untapped market in NCR already exists for the company, which lead analysts at Elara Capital give a target price of Rs 1,309 indicating an upside of over 30 per cent for the stock trading at Rs 1,004.
Mahanagar Gas, which benefits from city gas supplies to Mumbai, will also see a steady rise in industrial supplies. The company had won bids for gas supplies in Raigad region in Maharashtra, which has a huge industrial base too. As ramp-up in supply infrastructure is underway, the benefits from the region will accrue at a steady pace.
Meanwhile, analysts at IIFL estimate these two companies to report 25-30 per cent year-on-year growth in profit for the March quarter.
Gujarat Gas, with larger exposure to industrial segment, will also benefit from new ceramic plants (user industry) coming up in 6-8 months. However, the stock’s strong run up means upsides are relatively lesser at 9-11 per cent from analysts target prices of Rs 845 (Emkay Global) and Rs 861 (Elara).