Set For A Long Haul

Valuations of natural gas players appear attractive for a long term, considering the expected growth in profit in the coming years

ALTHOUGH natural gas players have weathered the storm much better in the past couple of months and are apparently fairly priced, retail investors can still find the sector attractive for long-term investments. The industry has showed a robust performance in the last quarter for FY10, which is likely to continue in future as the availability of gas increases and the necessary infrastructure is put in place.
The total natural gas supply in the country has risen to 175 mmscmd from 114 mmscmd last year, thanks to RIL’s KG basin fields. While the domestic demand for gas remains robust, the companies transporting gas continue to earn higher revenues from increasing volumes. The four listed companies in the industry — Gail, Gujarat State Petronet (GSPL), Gujarat Gas Company (GGCL) and Indraprastha Gas (IGL) — posted a healthy growth in net profit for the Mar ‘10 quarter.
The industry leader Gail posted a 17% rise in profits of its natural gas transmission business to Rs 506 crore in the quarter, as gas volumes jumped 39% to 114 mmscmd. Similarly, GSPL nearly doubled its bottom line to Rs 108 crore as its volumes nearly tripled to 36.2 mmscmd. The two listed city gas distribution (CGD) entities — Indraprastha Gas and Gujarat Gas —reported profit growth of 28% at Rs 51 crore and 73% at Rs 62 crore, respectively in the March 2010 quarter. The volume growth for them was around 22%.
As the availability of the natural gas is growing and demand remains strong, the transporting infrastructure is the only bottleneck in the future growth of the industry. All the companies have lined up heavy capex plans to extend their pipeline networks and increase their gas carrying capacity.
Gail alone is investing nearly Rs 35,000 crore between FY10 and FY14 to double its pipeline network. GSPL, which has already incurred a capex of Rs 2,800 crore in the past 4-5 years to set up a pipeline network spanning most of Gujarat, is further planning a capex of Rs 1,500 crore to augment its existing pipelines and set up CGDs.
IGL is also investing nearly Rs 3500 crore in next 5 years to expand its CGD business within the NCR region as well as Noida, Greater Noida and Ghaziabad. In view of the pending regulatory approvals, Gujarat Gas has not drawn any major capex plans except Rs 300 crore of annual capex.
With this the gross block of the gas industry is expected to double within the next 3-4 years, which will necessitate the players that were debtfree so far to borrow.
The players have started gradually cutting down on their dividend payouts to preserve cash. Although all the companies increased their dividends for FY10, the growth was lower than that in the profits marking lower payouts. Only in case of Gujarat Gas the payout increased as it gave a special one-time dividend of Rs 5 per share.
The recent dismantling of administered pricing mechanism for natural gas will have a great impact on this industry, although it is not the ultimate consumer. Gail stands to benefit due to the$0.11/mmBtu marketing margin it will now be able to charge , while passing on the increased cost to its customers. Gail is expected to earn additional net profit of around Rs 200 crore from this.
Contrary to the belief that the CGD businesses would find it difficult to pass on the price hike to the final consumers, Indraprastha Gas last week raised the CNG prices by around 25% across all its geographies. This won’t affect IGL’s volume growth, as gas still remains a cheaper option to liquid fuels and IGL holds a monopoly in its region.
The impact on Gujarat Gas is insignificant as less than 5% of its gas came from APM sources. Gujarat State Petronet being a pure transporter of gas won’t have any impact from the development.
The industry’s improving prospects have hardly remained a secret among investors. The industry has consistently outperformed the market over the past one year. With huge capex plans coming on stream, the industry is expected to continue with the growth momentum in the coming years. All the companies are currently trading in a priceto-earnings multiple (P/E) range of 13 and 18.5 as against the Sensex P/E of 20.3. These valuations appear attractive for long-term investment, considering the expected profit growth in the coming years.