NATURAL GAS INDUSTRY: Growth Pains to Continue on Low Availability

Once a sunrise industry, it is a challenging phase for India’s natural gas industry. Over the past year alone, there has been a wealth erosion of close to 25% for companies in this sector. With flagging domestic availability of natural gas, the near-term outlook for the industry remains clouded. The failure of RIL’s KG field led to an annual average drop of 10.7% in India’s domestic natural gas production over the last three years, a trend which is likely to continue despite the announcement of an increase in prices. “We do not see domestic natural gas production to scale up till March 2015. In fact, domestic natural gas production is expected to fall till then,” says Niraj Mansingka, associate director, Edelweiss Financial Services. According to him, gas production is expected to scale up beyond March 2015, and add 30-50 mmscmd till March 2018 depending on approvals. The other factor which will weigh on the performance of the industry is the regulatory overhang from the Petroleum and Natural Gas Regulatory Board (PNGRB), which has imposed several sharp tariff cuts for various pipelines in the past. The major overhang of PNGRB is mostly over, other than in the case of IGL where the hearing is still pending in the Supreme Court, and pending tariff for GAIL’s Gujarat pipeline network, says Nitin Tiwari, oil & gas sector research analyst, Religare Institutional Research. These imply that companies are going to earn much less for every rupee invested as compared to past. Return on capital employed (RoCE) and capacity utilisation of the industry would continue to be negatively impacted due to low domestic natural gas production, says Edelweiss’ Mansingka. Imports by way of LNG made up for a part of the shortfall, but a further growth from here appears difficult with Petronet LNG’s Dahej terminal reporting full utilisation. In fact, the delayed commissioning and expected low utilisation levels at its Kochi terminal is expected to bring down profitability. The weak outlook for Kochi, which now makes up 61% of capital employed and has driven a 6-9% cut in FY14-15 consensus EPS in 2013 so far, may continue to be a headwind despite the shares’ 39% underper- formance since end-2011, says a recent report from Barclays. The industry’s under-performance of late has taken valuations to historical lows as well as below global peers. However, the near-term pain is likely to continue. Investors should consider buying into some of these stocks only if they have a three- to five-year horizon.