City Gas Distributors In A Sweet Spot
City gas distribution companies are poised to gain from rising crude prices and growing adoption of environment-friendly fuels.
West Texas Intermediate crude has surged more than 17.6 percent since November 30, when the Organization of Petroleum Exporting Countries announced an agreement to cut production by 1.2 million barrels per day.
“The OPEC decision will certainly benefit the city gas distributors,” Jal Irani, senior vice president of Edelweiss Financial Services told BloombergQuint on the phone.
With the price of competing fuel, like petrol and diesel rising, the switch to much more economical CNG becomes viable.Jal Irani, Senior VP, Edelweiss Financial Services
Oil marketing companies have hiked prices of petrol and diesel twice since OPEC’s decision, and CRISIL Research expects the trend to continue in 2017.
We expect the price of petrol to rise 5-8 percent and that of diesel by 6-8 percent over the next 3-4 months after decision by the OPEC.CRISIL Research Report
In the first seven months of the financial year 2016-17, the consumption of natural gas in India grew around 8.5 percent. The demand for petrol and diesel rose 8.9 percent in the same period, while crude oil prices increased 22.2 percent.
The growing demand translated into higher stock prices, with Indraprastha Gas Ltd. and Mahanagar Gas Ltd. outperforming the BSE Oil & Gas Index in the last six months. Mahanagar Gas listed on the stock exchanges on July 1.
Edelweiss Securities expects COP21 commitments adopted by 185 nations including India to also improve the prospects of city gas distributors.
With widespread pollution across cities on one hand and COP21 commitments on the other, city gas companies are clearly poised for biggest gains.Edelweiss Securities Report
At the 21st session of the Conference of the Parties in Paris last year, countries agreed to cut emissions in a bid to keep the global average increase in temperatures below 2 degree celsius. India has committed to generating at least 40 percent of its electricity from non-fossil fuels by 2030.
The recent pollution control initiatives by the Delhi government also boosted demand. Indraprastha Gas, which gets all of its revenue from Delhi and the National Capital Region, saw its natural gas volumes grow by double digits in the last two quarters.
The ‘Maharashtra City Taxi Scheme 2016’, which could make the use of liquefied petroleum gas or compressed natural gas mandatory for all taxis and radio cabs operating in the state, is expected to aid Mahanagar Gas, which runs gas distribution networks in Mumbai, Thane, and Raigad. The management told analysts in the earnings conference call that it expects the law to come into effect by February.
The company has already signed gas supply agreements with Ola and Uber. The two taxi aggregators together have around 20,000 vehicles in Mumbai, and only 3,000-4,000 of them run on CNG, according to Edelweiss’ estimates. Mahanagar Gas will also experience a surge in volumes as new auto rickshaw permits get issued and more state-owned buses start using CNG.
15,000‐17,000 additional auto permits in the pipeline implies bright volume prospects for MGL.Edelweiss Securities Report
Above all, Indraprastha Gas and Mahanagar Gas have a virtual monopoly in their respective markets since the Petroleum and Natural Gas Regulatory Board allows five-year marketing exclusivity and 25-year network exclusivity to the winner of compressed natural gas networks.
Even if the marketing exclusivity ends, new players will find it tough to break into the market, Ambit Capital said in a report to clients.
It would be difficult for other players to get into city gas distribution given that building a compressed natural gas retailing network in a crowded city area and getting domestic allocations where the benefit proposition to the consumer is not quite robust.Ambit Capital Report
Gujarat Gas Ltd., another city gas distributor, hasn’t seen the same demand growth due to its unfavourable sales mix. Indraprastha Gas and Mahanagar Gas have similar product profiles with compressed natural gas and pipelined natural gas accounting for 80-85 percent of sales, while Gujarat Gas caters more to industrial and commercial clients.
In the second quarter, Gujarat Gas’ industrial gas volumes declined 12 percent.
Unlike power and large industrial users where gas competes with coal/liquid-fuel, city distribution has unique advantages of convenience, competitive costs and regulatory support.Ambit Capital Report
With pollution concerns on the rise, more industrial and commercial establishments are expected to shift to natural gas. That, in turn, will benefit not only Gujarat Gas but also Indraprastha Gas and Mahanagar Gas.
“City gas distribution companies look like a good bet because it gets consumed on the CNG side and the PNG side as well, and the requirement will persist going forward,” Mayuresh Joshi, a fund manager at Angel Broking told BloombergQuint on the phone. “With the cost of gas coming down and new distribution centres opening, the longer run benefits still hold.”