Mr. Harshad Katkar & Mr. Nilesh Ghuge, Institutional Research Analyst, HDFC Securities.
A sharp increase in domestic gas supply growth, from no growth over FY17-FY20 to a 12% CAGR over FY21-FY24E, and the uneven impact of COVID-19 on various gas consumers should shuffle the deck in the gas utilities sector. Coupled with global excess supply (over demand) keeping LNG prices competitive, this should benefit Indian gas utilities. We expect supply and (low) price led 9.8% CAGR in Indian natural gas demand over FY21-24E to drive earnings growth of 42-45% (FY21-FY23E) as well as stock price upside potential of over 19-27% for our top picks GAIL, GSPL, and Petronet LNG. Rising capacity utilisation should drive growth for these stocks, which currently trade at compelling valuations. On FY22E, GAIL, GSPL and PLNG are trading at a PER of 6.4-11.9x, a 17-39% discount to their five-year average. By FY22E, operating cash flows should improve by up to 21% YoY, and FCF yield should increase up to 1,020bps YoY for these three companies.
Strong earnings growth, improving RoEs and FCF: Improved asset utilisation over FY21-FY23E should drive earnings growth of 42-45% for our top picks GAIL (India) Limited (GAIL), Gujarat State Petronet Limited (GSPL) and Petronet LNG (PLNG). From FY21E to FY23E, free cash flow (FCF) should improve by INR 37bn for GAIL to INR 27bn, 2x for GSPL to INR 15bn and 4% for PLNG to INR 32bn. By FY23E, return on equity (RoE) should rise by up to 606bps (29% of FY21) against 13-132% over FY17-20.
Domestic gas supply to rise by 12% CAGR over FY21-24E, the highest increase since FY10: We estimate domestic gas supply to increase by 40% or 32mmscmd over FY21-24E, similar to FY09-11. Over FY09-11, domestic gas supply increased by 59% or 53mmscmd. Over Apr-09 to Mar-10, gas transmission company stocks appreciated by 65-123% (EPS by 19-247% YoY in FY10) and city gas company stocks by 36-100% (EPS by 19-26%YoY in FY10), driven by the expected benefit of rising gas supply and demand.
Low price, pipeline infrastructure expansion to ensure robust gas demand: Commissioning of long-distance gas pipelines, rising penetration of the city gas network post the 10th round of auctions in Nov-2018 and low gas price (Domestic and LNG prices are at their 10-year low) should drive 10% CAGR in Indian gas demand to 209mmscmd over FY21-24E after a decline by 1% CAGR over the past eight years (FY12-20).
Low prices should ensure strong domestic demand for LNG: Low LNG price, at less than 10% of oil price in a benign oil price environment, should ensure strong domestic demand from industrial sectors (power, petrochemicals, etc.). We estimate an incremental demand of 5.3mmtpa over FY21-FY23E, a CAGR of 10%. LNG price should continue to stay on the lower side due to excess LNG liquefaction capacity (39mmtpa over CY20-22) at a time of demand reduction due to COVID-19.
COVID-19 impact: After falling by 6% MoM to 130mmscmd in April 2020, gas consumption in India has bounced back 21% MoM to 157mmscmd in May 2020. Low LNG price and recovery in industrial activity have seen Industrial consumption recover from 126mmscmd in April 2020 to 151mmscmd in May 2020.