The concerns of city gas distribution companies
Near-term prospects for city gas distribution firms—Gujarat Gas and Indraprastha Gas—don’t seem too bright
The near-term prospects for the stocks of city gas distribution companies—Gujarat Gas Co. Ltd and Indraprastha Gas Ltd (IGL)—don’t seem too bright. That’s despite valuations being attractive, especially that of Gujarat Gas.
Since the beginning of this calendar year, the Gujarat Gas stock has declined by 31%, while that of IGL has risen 13%.
There are several reasons for the weakness in the Gujarat Gas stock. Firstly, the company has been facing volume pressure for a while now. Consider this: Gujarat Gas’s volumes came in at 264 million metric standard cubic metres (mmscm) in the March quarter, the lowest at least in the past 14 quarters. Higher gas costs and lower demand from industrial segment customers affected volumes last quarter. Secondly, in all likelihood, Gujarat Gas shareholders were expecting a comparatively better price in the open offer made by Gujarat State Petroleum Corp.
After the sharp decline, Gujarat Gas stock valuations do look attractive, but then triggers for outperformance are few and far between. For one, the outlook on volume continues to be weak. After the March quarter results, many brokerages have trimmed volume assumptions for the year. Given the grim scenario on the domestic gas supplies front, incremental volume will have to come from regassified liquefied natural gas (RLNG), which is costlier.
Given that most of Gujarat Gas consumers are from the industrial segment, the company’s ability to increase costs is capped, an analyst said. This means that gross spreads could very well be under pressure.
What about IGL then? It, too, has faced volume pressure in the March quarter. However, going forward, unlike Gujarat Gas, analysts have a favourable outlook on IGL’s volumes.
“We expect compressed natural gas volumes to pick up going forward as the state (Delhi) government introduces 2,500 new buses during the year. Likely addition of 45,000 new autos going forward will also add to volume momentum," Standard Chartered Research analysts wrote a 24 May note.
Additionally, diesel price increases make gas look better as an alternative. However, the major game changer could be the Supreme Court verdict on the IGL and Petroleum and Natural Gas Regulatory Board (PNGRB) case on tariffs, which is expected in July. An unfavourable verdict is the biggest risk for the IGL stock right now.
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