Bidding reforms the biggest answer to senescence
Faster CGD rollout could result in longevity of volume growth
* Niti Aayog envisages rollout of city gas distribution (CGD) networks in 326 cities by 2022. CGD bid rounds have not been a great success due to lack of speed, poor selection of geographical areas (GAs) and restrictive bid criteria.
* The Petroleum and Natural Gas Regulatory Board (PNGRB) has been working upon reforms to enable faster and more effective rollout.
* Our analysis suggests that reforms-led faster rollout could be the biggest driver for rerating of the CGDs through longevity to high volume growth.
Poor progress so far
* Since launch in 2008, we have seen eight rounds of CGD bidding so far – the last one is yet to be awarded completely.
* Of the 107 GAs that came up for bidding, only 51 have been awarded. The remaining bids were cancelled because of poor response and/or lack of proximity to existing gas network. Delays of as long as five years have been witnessed in award of GAs post launch of bidding round!
* Of the 51 GAs awarded, 35 have been awarded since 2015 and only 11 of these are operational. Of the 16 GAs awarded prior to 2015, 10 are operational – licenses for two were revoked due to non-compliance of Minimum Work Program (MWP).
Rollout of just 100 cities in next 10 years could result in volume CAGR of 8.5% for 20 years
* PNGRB has been mulling reforms that provide (a) equal footing to smaller but capable firms in bids, (b) rollout of relevant Gas, and (c) policy enablers for faster implementation.
* So far, we have seen limited participation by private players due to restrictive bid criteria. A total of 15 private entities have participated in the bid rounds so far, either alone or in partnership with PSUs. A total of 11 GAs have been won by these participants. We believe that participation of smaller players could result in emergence of innovative solutions.
* Against the aim of extending CGD in 326 cities by 2022, even if PNGRB rolls out just 10 cities per year, each city having a potential of a meager 0.2mmscmd, we estimate that it could result in volume CAGR of 8.5% for the next 20 years for the industry, combined with the growth from already awarded GAs.
IGL remains top pick
* We believe that reforms could provide further longevity to what we presented in our detailed report, Expanding Horizons, November 2017. We estimate 12%+ CAGR for Indraprastha Gas (IGL) and Gujarat Gas during FY17-22 and ~7% volume CAGR for Mahanagar Gas (MAHGL).
* Valuing IGL at 30x consolidated average FY19-20E EPS, we reiterate Buy with a target of INR416. Gujarat Gas also presents excellent potential for volume growth with newer areas awarded in 2016 yet to ramp up. We reiterate Buy with a target of INR1,000, valuing it at 27x average FY19-20E EPS.
* MAHGL is likely to witness decline in EBITDA/scm in addition to low volume growth prospects. We reiterate our Neutral stand with a target of INR1,219, valuing it at 22.5x average FY19-20E EPS.
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