Lower gas prices a boon for Indian companies

Gas, tiles, fertiliser and power sectors to benefit the most, say analysts

Easing prices of liquefied natural gas (LNG) globally will be a boon for a lot of Indian companies which use it as an input. Unlike in the past, experts say global LNG has turned into a buyer’s market.

Falling production of natural gas in India has forced companies in the oil and gas, tiles, fertiliser and gas-based power generation sectors to rely heavily on imported LNG in recent years.

“We expect nearly 100 million tonnes of new LNG capacity to come online in the next three years alone, versus 36 mt in the past five years. Meanwhile, demand in the hitherto largest markets of Japan and Korea is likely to fall,” write analysts at Nomura, in a recent report on the sector.

The International Energy Agency believes growth in natural gas demand will slow down to 1.5 per cent a year globally through 2021. India and China would drive growth, it says.

In the domestic market as well, gas prices were recently cut by 20 per cent. Stocks of most of these buyer-companies have started moving up this year. Power companies, though, continue to be saddled with problems such as high debt and low demand and their stocks have been falling.

  Those benefiting from easing of LNG prices include Petronet LNG, GAIL, Indraprastha Gas (IGL) and Gujarat State Petronet (GSPL). Most city gas distribution companies have cut prices of CNG (compressed natural gas) and piped natural gas by two to three per cent. Such price cuts could further enhance CNG’s attractiveness versus other automobile fuels. With gas prices headed southwards, companies can better manage a rise in staff costs and a weaker rupee, say analysts.

While IGL is a play on an increasing government push for environment-friendly fuels, GAIL stands to benefit from capacity ramp-ups and improving transmission volumes. Increase in final rates by the regulator will also be a key catalyst for GAIL, which transports gas through its pipelines across India. Petronet LNG is the key gateway for LNG import in India and will benefit from rising demand for it and benign prices.

“With most expanded capacity tied up and five per cent annual tariff (rate) escalation a near certainty, risks to earnings for Petronet LNG are the lowest among our coverage,” adds the Nomura report.

Natural gas is a key input for the tiles industry. Leading tile players Kajaria Ceramics and Somany Ceramics are likely to witness healthy expansion in their operating margins amid benign LNG prices. Margins are likely to expand, despite the fact that some of these gains will be passed on to end-consumers. An increasing thrust on affordable homes and imposition of anti-dumping duties on tiles are growth catalysts.

Though lower gas prices are a pass-through for fertiliser companies, they have a favourable impact on these companies’ subsidy burden and working capital need. National Fertilizer, with five gas-based urea plants, remains the biggest beneficiary. The company saw a turnaround in the March quarter and had a net profit of Rs 31 crore (versus net loss in the year-ago quarter), driven by savings in interest and operating costs. Chambal Fertliser and Tata Chemicals will also benefit, as will Deepak Fertilizers and Coromandel International that are mainly in the complex fertiliser space. Though gas supply to Deepak remains suspended due to ongoing litigation, analysts expect normalisation of availability and a sharp increase in profitability during FY17. Sageraj Bariya at East India Securities says that improved availability and lower gas prices will help new capacities that had remained stranded because of supply issues.

In the power sector, GMR Infrastructure, GVK Power Infrastructure, Lanco Infratech and Torrent Power will be key beneficiaries. Torrent Power’s Sugen plant in Gujarat has seen significant improvement in output. Overall, for private entities, power production in April and May rose 22 per cent and the blended plant load factor has improved to 61 per cent, from 58.7 per cent in the same months last year.

GMR Infra had reported a more than four-fold increase in its energy segment’s operating earnings to Rs 1,161 crore in FY16, from Rs 222 crore in FY17. For GVK Power, its energy segment saw the margin on these earnings improve to 51.9 per cent in FY16 as compared to 15.6 per cent the previous year. Increased supplies can help its three gas-based projects see improved performance. Lanco Infratech also has gas-based capacities, in addition to hydro and thermal power assets that can benefit.

Still, GVK and GMR have other business segments; also, they and Lanco have high debt. So, the gains might not be significant on their consolidated numbers. Torrent, apart from generation, is in power distribution and analysts are looking at signing of power purchase agreements to provide a trigger.