Gas utility companies in a sweet spot

Indraprastha Gas is expected to see stronger gains, as compared to Mahanagar Gas, say analysts

The domestic gas price has been cut marginally from $2.50 per mBtu (million British thermal unit) to $2.48 per mmbtu, but gas distribution and marketing companies are in a sweet spot. Price is one among a few other triggers that 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, contrary to expectations that the government will hike the gas price to ensure that gas exploration and production remains viable, the price has been lowered further, albeit marginally. Low prices will benefit the users of domestic gas supplied by city gas distribution companies, such as 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 miniscule, 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, too, analysts see a glut in LNG supply, which will help in keeping gas prices low. The upgrade 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 the National Capital Region (NCR), will also benefit from a ban on fuel oils and pet coke usage in the region. A large untapped market in NCR already exists for the company, prompting analysts at Elara Capital to give a target price of Rs 1,309, indicating an upside of over 27 per cent for the stock trading at Rs 1,026. 

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 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 six to eight months. 
 

However, the stock’s strong run-up means upsides are relatively lesser at 7-10 per cent from analysts target prices of Rs 845 (Emkay Global) and Rs 861 (Elara).