Gas Utilities: On a strong wicket

12 Sep 2023 , 10:27 AM

The annual reports of IGL, MGL and Gujarat Gas (GGAS) are upbeat on long-term growth prospects for the industry. Their balance sheets are supportive of the massive infra investments that are lined up (low/no leverage) with strong OCF and attractive return ratios. IGL is relatively better placed while GGAS can re-rate if LNG is weak and propane is firm. 

Good disclosures, robust outlook: 

The annual reports (ARs) of the CGDs give a good perspective on the companies sustaining their growth trajectories, on the back of govt help (APM gas allocation), geographical expansion, regulatory support (pollution control), and ease of gas imports. As such, they are also planning massive infra investments to meet the demand, and augmenting tech backbone for consumer convenience. Diversification of fuel baskets is on the cards (HPHT.LNG contracts etc.). Selectively, M&A and green investments (solar, H2, etc.) are being evaluated. 

Strong OCF, return ratios: 

While capex intensity is set to rise from hereon (expansion/ inflation etc), funding is not a concern given the robust cashflows. WC is well under check with companies having the ability to pass on fluctuations in gas costs on an annual basis. Rising cash pile on the books is depressing the ROEs, which at 17-20%, seem attractive nevertheless; the same holds for ROCEs that are ranging between 19-23%, despite the ongoing capex. 

Stocks will await auto fuel price cuts: 

Analysts of IIFL Capital Services forecast the CGDs to register 9-15% p.a. earnings growth through FY24-26 (except MGL), which assume no margin expansion; while growth is highest for GGAS it has risks given volatility commodity prices; its stock can re-rate if LNG is weak and propane firm. At 12x FY25, MGL is the cheapest CGD and can re-rate if volumes jumpstart; Relatively, IGL seems better placed; here, M&A can be pivotal for the stock. That said in short term, all CGDs stocks will await any potential price cut from OMCs, which may risk attractiveness of CNG and compress margins.