Regulations to drive growth in sector
The attractive assured returns (12% post-tax) through fixed tariffs, uncapped
leverage, streamlined and time-bound process of authorization of pipelines, and
competition-enhancing policies make regulation the driving force behind growth in the
gas transmission sector. Also, the city gas distribution (CGD) sub-sector (a focus area
for the regulator), expects a spurt in activity with a transparent bidding process for
authorization, time-bound exclusivity clauses and only partially regulated margins in
place to attract players.
Planned pipelines to complete circular loop connectivity
A national gas grid (to be constituted largely of GAIL’s and Reliance Industries’
pipelines) has been envisaged as the backbone for country-wide gas transmission.
With more than 7,800 kms of pipelines already approved by the regulator, the circular
loop of connectivity from various sources of gas (indigenous fields as well as LNG
terminals) to major consumers (energy-intensive industries and CGD networks) is
expected to fructify in the next 3-4 years.
Demand growth to remain strong going forward
The inherent cost advantages of gas, apart from environmental benefits, have
supported India’s ever increasing appetite for gas. Fertilizer units and power plants are
its primary demand drivers. CGD networks (being the regulator’s focus area) and
industries like refining/petrochemicals and sponge iron are set to benefit from natural
gas.
CGD rollout will complete last-mile connectivity
The rollout of CGD networks across major urban centers in India (which is a very
under-penetrated market in CGD) will complete the last-mile connectivity for domestic
users, short-haul commercial vehicles and small industries, enabling them to switch to
natural gas.
Outlook: Positive; GAIL and IGL best-positioned to leverage growth in sector
GAIL (in gas transmission) and Indraprastha Gas (IGL, in CGD) are best-positioned to
benefit from the hectic activity in the gas sector, and are likely to grow symbiotically
over the next 3-5 years.
GAIL plans to spend INR 300 bn to double its gas transportation capacity by adding
five new approved pipelines. The growth in gas transmission volumes is likely to more
than offset the marginal cuts in existing Hazira Vijaipur Jagdishpur (HVJ) pipeline
tariff. Further, its investments in CGD are vehicles for future growth. At a CMP of INR
258, GAIL is trading at 9.9x P/E and 7.5x EV/EBITDA (FY11E). We estimate GAIL’s
SOTP at INR 366 and initiate coverage on the stock with a ‘BUY’ recommendation.
IGL stands to gain from the huge growth in CGD infrastructure (+30% increase in
outlets in next two years) in the National Capital Region (NCR) due to support from
the Delhi government (providing land for stations; increase in CNG buses) and
increased geographical expansion. This translates to a ~16% increase in IGL’s
volumes over the next two years, which could more than offset any reduction in
margins (higher gas costs). At CMP of INR 123/share, IGL is trading at 7.8x P/E and
3.8x EV/EBITDA (FY10E). We maintain ‘BUY’ on the stock.
Niraj Mansingka, CFA
+91-22-6623 3315
niraj.mansingka@edelcap.com
Abhishek Agarwal
+91-22- 4063 5417
abhishek.agarwal@edelcap.com
India Equity Research | Oil & Gas Sector Update