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Gas Utilities : Gas consumption at record highs, growth now to trickle - Kotak Institutional Equities

Posted On: 2023-11-30 13:53:41 (Time Zone: IST)


Indian gas consumption is up sharp 15% yoy to ~185 mmscmd in FY2024TD. Apart from the increased HPHT gas production, LNG imports have been markedly higher. After multi-year declines, gas offtake by the power sector picked up due to seasonal factors. New fertilizer capacity also fully ramped up. With lower prices, oil to gas switch demand also recovered. But growth will likely trickle now. CGDs segment growth has considerably slowed, and fertilizer may not need much additional LNG. We remain cautious on gas utilities with SELL on PLNG and REDUCE on GAIL, IGL and MGL.

Gas consumption up strongly in FY2024

Several stars have aligned to push Indian gas usage to record highs this year. KG-D6 production has ramped up to ~30 mmscmd. Most of new fertilizer capacity that has been gradually commissioning is also fully operational now. After five years of decline, gas offtake by the power sector recovered temporarily due to seasonal factors. Also, with much lower LNG prices (versus past two years), oil-to-gas arbitrage demand recovered in refining and other industries.

CGD demand growth has considerably slowed

While gas volumes are up strongly in FY2024, we note that from 2012 levels (previous KG-D6 production peak), gas consumption has grown at below 1% CAGR. With policy focus, priority gas allocation and low APM prices, over 2012-22 CGDs' gas demand was up 2.2X (8% CAGR), whereas growth was weak for most other key demand segments. With rising APM shortfall and higher APM prices (new formula did not bring much relief), CGD's pricing advantage has withered and growth has considerably slowed (~3% CAGR over FY2022-24E).

Medium-term volume outlook weak; LT outlook even weaker

- CGDs. In our view, with new APM price formula and rising shortfall, CGDs' gas cost will keep rising. Despite several new CGDs starting operations, CGDs' demand growth will be weak. For other consuming segments, outlook is weaker.

- In power sector, APM gas allocation keeps declining. Also, at current APM/LNG prices, gas-based generation has limited offtake in merit-order dispatch regime. Volumes will likely remain weak, unless there is policy support (such as for offsetting impact of renewable power intermittency issues).

- In fertilizer, no new gas-based fertilizer capacity is planned. Rather with policy focus now on green hydrogen, there will be mandates soon to switch to green hydrogen usage, with entire fertilizer capacity moving to green H2 over LT.

- For other segments, gas usage will continue to be dependent on price arbitrage of liquid fuels versus gas. With not much incremental domestic gas, and relatively tighter global LNG markets, we believe the pace of switch to gas will remain slow. Also, similar to fertilizer, there will be rising policy focus to switch to green H2 usage instead of gas in the longer term.

Remain cautious on gas names

Gas consumption in FY2024 has been higher versus our earlier estimates. However, with CGD sector demand growth considerably slower, the growth outlook remains weak. We remain cautions on gas utilities.

Petronet LNG: Maintain SELL with revised FV of Rs175 (Rs165 earlier). Driven by higher LNG imports in FY2024E, we have increased our near-term volume assumptions, and have increased FY2024-26E EBITDA by 7-9%. However, with subdued LT gas demand outlook, LNG demand outlook is weak. With several new terminals, competitive intensity has increased. PLNG has also struggled to recover use-or-pay charges from several of its customers (including its own promoters). With its key Qatar contracts due for renewal, its bargaining power is low. PLNG's recent decision to diversify in petrochemicals with large capex of Rs207 bn will be a drag. Maintain SELL.

Maintain REDUCE on GAIL with FV Rs Rs120 (unchanged). We continue to believe that worst is behind for GAIL with integrated transmission tariff revisions, and decline in gas prices from record highs. However, outlook is not too bright. In transmission, GAIL is realizing much higher tariff (versus approved by PNGRB), and is a positive. But, with reduced allocation of APM gas, its costs are rising. Also, with volumes outlook weak, and large capex in new pipelines ongoing, transmission RoCEs will get weaker. Its commodity business continues to suffer, and profitability is likely to remain weak.

Maintain REDUCE on IGL (FV Rs375) and MGL (FV Rs975). Our thesis that CGD demand will not recover much with the implementation of new APM pricing formula, seems to be playing out. For 1HFY24E, MGL's volumes were flat yoy (versus earlier trends of 4-6% yoy growth) and just 3.3% yoy for IGL (versus double-digit yoy growth earlier). In the new APM pricing regime, CGDs gas costs will continue to increase gradually due to a combination of (1) increasing shortfall of APM, (2) rising share of new wells in APM portfolio (20% higher prices) and (3) APM ceiling price increases. Electric vehicles (EVs), as such, is a key threat to the CNG business model, and eroding advantage of CNG (versus petrol/diesel) makes it even more potent.

Maintain BUY on GSPL (FV Rs375). Continued delays in tariff revision for GSPL's HP pipeline remains a key overhang. We assume a ~20% tariff cut from April 2024. At CMP, there is a ~70% holding company discount on GUJS's 54% GUJGA stake, which we believe is excessive. We believe that the holdco discount could narrow with rising shareholder returns from higher dividends and potential buyback after the Gujarat government's recent policy.


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