Rising pollution curbs aid volume prospects for city gas distribution cos
With pollution control norms getting stringent in Delhi-National Capital Region, industrial demand for gas is on the rise and IGL remains in the spotlight
City gas distribution companies (CGDs) have continued to remain the Street’s favourites with rising demand for cheaper and cleaner fuel. The focus on pollution control is driving prospects for these companies further.
Demand for piped natural gas (PNG) from the industrial sector is on the rise, while compressed natural gas (CNG) demand has been a key growth driver for CGD’s. Geographical expansions, being undertaken by CGDs, have improved forward volume and earnings outlook too. Not surprising, stocks are seeing regular earnings upgrades.
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Shares of Indraprastha Gas Ltd (IGL) and Mahanagar Gas Ltd (MGL) gained 3-4% on Tuesday. Nomura Global Market Research said CGDs were the best way to play gas theme, and IGL remains its top pick.
With pollution control norms getting stringent in Delhi-National Capital Region (NCR), industrial demand for gas is on the rise and IGL remains in the spotlight. The Air Quality Commission had recently mandated the use of piped natural gas for all industries operating in New Delhi by 31 January. This will aid gas demand in Delhi-NCR and benefit IGL that caters to gas distribution in the region.
With a new permanent commission on air pollution, the secular growth outlook improves further for IGL, said analysts at Nomura. With stronger volumes and earnings growth versus peers, IGL remains Nomura’s preferred pick.
On Mahanagar Gas Ltd, the brokerage house says that while volume growth is slow, margins are strongest and valuations are inexpensive
The outlook for MGL and IGL is also improving with rebounding CNG demand in metro towns post-pandemic led disruption. Analysts expect performance of these companies to be significantly better in the second half of FY21 compared to the first half.
Gujarat Gas also remains well placed for growth, being the key beneficiary of rising industrial demand. Industrial sales' contribution to overall sales are larger for Gujarat Gas compared to IGL and MGL. The company currently is deriving major benefits from pollution curbs in Morbi industrial cluster.
However, according to the NGT’s (National Green Tribunal) list of critically/severely polluted industrial clusters, Gujarat has five clusters where volume boost (like Morbi) could come up. Nomura believes after strong volume growth over the last two years, Gujarat Gas’s volumes/margins can grow further in the coming months.
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