Drop in raw material prices to give a fillip to city gas distribution firms, says CLSA

The city gas distribution (CGD) companies are likely to benefit from a slew of positive reforms and falling raw material prices in the year 2020.

According to CLSA, CGD stocks such as Indraprastha Gas Ltd (IGL), Mahanagar Gas Ltd (MGL) and Gujarat Gas are well-placed to gain from a decline in raw material prices, a slew of reform-linked tailwinds and rising competing fuel price.

The global brokerage reiterated ‘Buy’ rating on the stocks and raised its target price (TP).

CLSA raised Gujarat Gas EPS by 7-9 percent and target price to Rs 315 from Rs 270 earlier.

“Gujarat Gas is a play on tighter environment norms against the use of polluting fuels in small factories, even as soft LNG price remains a tailwind for the stock,” CLSA said in a report.

It raised TP for IGL to Rs 540 from Rs 510 and for MGL to Rs 1,425 from Rs 1,380 earlier.

“An approximately 23 percent fall in domestic gas price in April 2020 after the 12.5 percent cut in October 2019 will bring down raw material cost and boost volumes/margins. Inclusion of gas in GST, added push on CNG vehicles after BSVI adoption in April 2020, further tightening of norms against polluting fuels, and tax benefit on CNG vehicles are other possible tailwinds,” CLSA said.

The brokerage expects MGL’s infra exclusivity in Mumbai to be extended after it expires in 2020, which may remove a big overhang.

“MGL has the best risk-reward, IGL has the most consistent growth in the space, and Gujarat Gas is a play on weak LNG prices,” CLSA said.

Moreover, more than 15 percent rise in Brent crude price in the past three months on bigger cuts by Opec may drive up prices of competing fuels such as diesel and petrol.

This combination of falling raw material costs and rising competing fuel prices will further raise the discount of CNG/PNG to competing fuels, which will support volume growth as well as give room for additional margin expansion in 2020, the report added.

Continued depressed LNG prices could be another tailwind to support growth in the industrial and commercial sectors.

Further, the gas sector may see game-changing reforms in 2020. Being key gas consumers, city gas companies outside Gujarat may see big gains from the inclusion of gas in GST.

Any further action to curb the use of polluting fuels, as recommended by the National Green Tribunal, could be positive for CGD players such as Gujarat Gas, CLSA said.

There has been a demand to bring down the GST rate of CNG vehicles in-line with Electric Vehicles, i.e to 5 percent from 28 percent. If accepted, this would be a big positive for CNG demand.

Additionally, the 25-year period of infrastructure exclusivity for MGL’s Mumbai (GA-1) licence expires in May 2020. CLSA expects this exclusivity may be extended by 10 years, which could allay a big investor concern for MGL.

“This should also be taken as a positive read-through for IGL, which will see its 25-year infrastructure exclusivity in Delhi expire in 2023,” CLSA said.

High volume growth and weak LNG price should start a virtuous cycle for Gujarat Gas as higher industrial volume increases mix of cheaper spot LNG, which will bring down the unit raw material cost. This should attract more volumes and boost margins.

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