Gas stocks offer reason to cheer
Stocks of city gas distributors such as IGL and MGL are being re-rated on account of better volume growth outlook and margin improvement
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Gas firms’ stocks have had a good run this fiscal year. So far, share prices of GAIL (India) Ltd, Indraprastha Gas Ltd (IGL) and Petronet LNG Ltd have risen in the range of 21-60%.
The Mahanagar Gas Ltd (MGL) stock has gone up about 80% from its issue price since listing. Not without reason.
For one, the operating environment for these companies has improved. Stocks of city gas distributors such as IGL and MGL are being re-rated on account of better volume growth outlook and margin improvement.
Analysts expect further improvement in profit margins of IGL and MGL on account of the recent gas price cut. But that should show in the December quarter results. For Petronet, higher liquefied natural gas (LNG) demand and bringing forward the completion of its Dahej expansion augur well.
Secondly, all the above companies put up a remarkable show in the June quarter. MGL and IGL saw operating profit margins expand. GAIL’s petrochemical business swung to profit at the Ebit (earnings before interest and tax) level in the June quarter from a loss in fiscal year 2016. In fact, its petrochemical segment is expected to continue to report profit for this year, helped by higher volumes from its expanded petrochemical facility.
Currently, GAIL, IGL, MGL and Petronet trade at 15.6 times, 19.5 times, 20 times and 23.5 times estimated earnings for this fiscal year, respectively. Valuations aren’t cheap. It is possible that the September quarter results may not turn out to be as robust as the June quarter. Still, it’s not that expectations are low for the September quarter.
Strong LNG demand should help keep utilization levels at Petronet’s Dahej terminal high. “Management had indicated partial commissioning of a vaporizer at Dahej at the end of 1Q. Further updates on start of the expanded facility and resolution of Kochi pipeline RoU (right of use) issues will be key to watch out for,” wrote Arya Sen and Ranjeet Jaiswal of Jefferies India Pvt. Ltd in a report on 10 October.
For IGL, Motilal Oswal Securities Ltd expects September quarter compressed natural gas volumes at 3.4 million standard cubic metres per day or mscmd (+10% YoY, +3% QoQ). The brokerage firm has modelled total volumes of 4.4/4.6 mscmd in FY17/FY18. MGL is expected to report healthy volume too. GAIL’s petrochemical business is likely to continue the positive momentum.
Investors would do well to follow the ramp-up on the Pata petrochemical expansion for the GAIL stock. From a medium-term perspective, if crude oil prices improve, then margins of the company’s petrochemical and LPG (liquefied petroleum gas) business should expand. However, worries about potential losses from its US LNG contracts (which are supposed to work out pricier than spot LNG prices in Asia) act as an overhang.