GAIL, Petronet To Gain As India's Gas Usage Spikes, Says HSBC
India’s city gas distributors will play a dominant role in improving demand for the cleaner fuel in the medium term even amid a greater push towards electric vehicles and improved power supply, according to HSBC.
The sector, the research house said in a report, will increase the country’s natural gas demand by 35% by 2030—by when the city gas distribution network is projected to cover 70% of India’s population from 20-30% at present.
Factors like increased network coverage, improving gas pipeline connectivity, a 15% expected increase in domestic gas production in the next two years, probability of gas coming under the goods and service tax, and the push towards a cleaner environment are potential demand drivers, the report said.
Most growth opportunities in city gas distribution come from rising adoption of domestic piped natural gas as kitchen fuel and compressed natural gas as transportation fuel, it said, with elevated crude oil prices being a catalyst. Stricter environmental regulations will also increase gas demand from the industrial sector, the report said.
The report said the potential for liquefied petroleum gas users to switch to natural gas exists because LPG is subject to variations in crude oil prices in the international market but PNG costs are determined by the administered pricing mechanism. As of now, LPG costs 35% more than PNG.
“We believe a 25% penetration on the total network by 2030 will add 5 crore new domestic PNG connections,” the report said. “This can add 16.6 million metric standard cubic metres per day of gas demand over the current 2.5 mmscmd from this segment.”
HSBC said rising retail prices of diesel and the increased cost of diesel vehicles on account of new emission norms will increase the medium-term attractiveness of CNG-powered vehicles. Moreover, the option of choosing a CNG vehicle will grow with the expansion in the distribution network, it said. “Addition of newer geographical areas will further result in increased penetration in the existing gas as even long-distance commercial vehicles will find it attractive to switch to CNG from diesel.”
The report said CNG vehicles remain attractive at current prices over their battery-powered counterparts and will be a preferred alternative in the commercial vehicle segment.
Gas demand in the industrial segment will be driven by focus on ESG (environmental, social and governance) as natural gas emits the lowest levels of carbon dioxide. “ESG policies for various corporates will drive the movement towards natural gas and wherever it’s not voluntarily driven, customers will make vendors move to a more sustainable source of energy which in the short run and in the most cost-effective way is likely to be CNG,” the report said.
The research house anticipates GAIL India Ltd. and Petronet LNG Ltd. to be the key beneficiaries of India’s rising gas demand, with their earnings expected to grow at annualised rates of 21.7% and 10.5% over FY21-23, respectively.
With GAIL and Petronet LNG trading at 9.7 times and 9.9 times their projected earnings for FY23E, respectively—much below their 10-year trading averages—their valuations, too, remain attractive, it said. The report issued ‘Buy’ ratings to both the companies, with target prices of Rs 200 and Rs 280. That’s an upside potential of 25.8% for GAIL and 17.3% for Petronet LNG.
Risks To Estimates
GAIL: Lower-than-expected marketing volumes and marketing margins on natural gas and lower-than-estimated transmission tariffs.
Petronet LNG: Lower-than-expected demand growth and a failure of customers to lift the contracted long-term LNG volumes.