Why Analysts Keep Faith In Worst-Performing City Gas Distributor
Gujarat Gas Ltd. has fared worse than its peers as India’s largest city gas distributor struggles to maintain its margin. Still, analysts are optimistic given the volume growth expectations and falling international liquefied natural gas prices. Shares of the supplier of fuel have fallen 10 percent in the last six months compared with a 4 percent increase for Indraprastha Gas Ltd. and 6 rise for Mahanagar Gas Ltd.
A volatile margin led to this decline, said Probal Sen, oil and gas analyst and senior vice president of IDFC Securities. And that’s because Gujarat Gas gets more than two-thirds of its revenue from industries.
For industrial use, gas distributors can only supply imported fuel, prices of which are linked to the global market and prone to fluctuations. By comparison, prices of locally produced gas used as cooking and auto fuel are stable since they are regulated and change only twice a year.
Liquified natural gas also competes with cheaper alternatives such as coal, coking coal and petcoke for industrial use. That makes it difficult for city gas distributors to increase prices of gas supplied to industries.
What’s Keeping Street Bullish
Nearly 85 percent of the analysts covering the stock have a ‘Buy’ recommendation, according to Bloomberg. That’s aided by its volume growth forecast of 12 percent in the next two years—the highest among peers.
Successful bids to supply gas in more regions also improved the outlook. Gujarat Gast won the highest seven geographical areas compared with four by Indraprastha Gas and none by Mahanagar Gas in two auctions the industry regulator conducted in the last six months.
Gujarat Gas has the best growth prospect among peers, according to IDFC Securities’ Sen. Every operational and regulatory change is working in its favour, he said. “Just have to wait for the market to believe in this growth story.”
Tile Industry An expected pick-up in demand from gas in ceramic tilemaker in Morbi, Gujarat could aid volume growth.
The National Green Tribunal recently ordered closure of polluting units that are use coal gas as fuel. Only 50 percent of the units in Morbi operate on natural gas, which means the rest will also switch to using gas as fuel. That would help boost volumes for Gujarat Gas, giving it pricing power.
Falling LNG Prices
Singapore LNG has declined by half in the past six months as supply outpaced demand. That would aid the company’s financials and margin.
Gujarat Gas trades at 18.06 times its estimated earnings for financial year 2019-20, according to Bloomberg data. The 12-month return potential is 25 percent.