Volume outlook spells gains for gas utilities; Gujarat Gas, IGL stocks gain

Shares of gas utilities have seen sharp gains since the start of July. Gujarat Gas, Mahanagar Gas (MGL) and Indraprastha Gas (IGL) have gained 7-18 per cent during this period, and there could be more gains ahead, suggest analysts. 

First, the outlook on volume growth remains robust, supported by factors such as favourable government policies, improving supplies of imported gas, the cost-effectiveness of CNG (compressed natural gas) as a fuel, lower penetration levels and an increasing piped gas (PNG) network. All of this indicates sustainable long-term growth potential. The ban on pet coke usage has contributed to a rise in industrial demand for gas. 

While rising natural gas prices may be a concern, experts say growth will still continue at a healthy pace. Rating agency CRISIL, for instance, says in the past higher prices have impacted LNG (liquefied natural gas) consumption in India, a price-sensitive market. However, things are slightly different this time around, with consumption rising six-seven per cent to 20 million tonnes (mt) in 2017-18. Improved competitiveness to alternatives such as fuel oil is boosting industrial usage, while the regulatory push to expand city gas distribution networks is stoking demand further. In many cases, gas still remains a cheaper and greener alternative. 

Meanwhile, earnings growth reported by MGL and Gujarat Gas for the June quarter adds to confidence. MGL reported better-than-expected operating performance, driven by 13 per cent rise in CNG volumes. Analysts at Elara Capital have raised their FY19 and FY20 earnings estimates by 9 and 10 per cent, respectively, on expectations of higher per unit profitability, as MGL has shown the ability to pass on higher gas cost by raising CNG and domestic PNG prices twice during the quarter. 

Gujarat Gas saw volumes dip, attributable to lower residential gas usage during the peak summer season but the same is expected to gain momentum after August. Pricing power still remained strong, given the sharp rally in oil-linked alternatives. Edelweiss estimates Gujarat Gas’ earnings to grow at 37 per cent annually during FY18-21. 

While IGL is yet to report numbers, growth is expected to be led by expansion in the National Capital Region and its adjacent regions.  Successful new city gas distribution licence wins can provide more triggers. Analysts say in 48 out of 86 new areas Gujarat Gas and IGL managed to grab one block each but there are more opportunities ahead.