New winners and losers likely on policy changes in gas sector
Completion of Indian gas grid, jump in LNG import capacity, rise in domestic gas output, rapid CGD expansion and court orders to replace polluting fuels with gas are set to boost India’s gas consumption. Our top pick GSPL (BUY) is a play on strong gas volume growth, and GGL (ADD), our preferred pick in CGD, on switch to gas from polluting fuels. Disruption in CGD from competition and deregulation of gas price is likely to hurt volumes and margins of investor favourites IGL (SELL) and MGL (HOLD) and lead to derating. Deregulation in an improving global gas price environment may help re-rate ONGC (BUY). GAIL (HOLD) may gain from strong volume growth and tariff reforms in transmission. Outlook for gas marketing, experiencing pain in FY21, is set to improve but long-term challenges remain. PLNG (HOLD), another investor favourite, may be hit by domestic gas output rise and LNG import overcapacity in Gujarat from CY23.
* Competition & gas deregulation risks for CGD & NGT order to ban polluting fuels an opportunity; GGL top pick: CGD may be hit by competition and gas price deregulation; OMCs are likely to emerge as formidable competitors for IGL and MGL. MGL is the most vulnerable to margin fall given its lofty margins (Rs9.75/scm vs Rs4.73-6.45/scm for peers in FY20) and IGL to derating given its lofty valuation (24x FY22 vs 12.1-18.5x for peers). Potential positive in CGD is NGT order of Jul’20 requiring ban on furnace oil and petcoke as fuel. GGL is best placed to gain from any switch to gas from polluting fuels given its presence in areas where industrial volumes dominate. GGL’s volume recovery from lockdown is also quicker than peers. We upgrade GGL to ADD from HOLD (no change in EPS and target price). We reiterate SELL on IGL. We have cut MGL’s EPS by 8-7% and target price by 9% but upgraded it to HOLD given modest valuation after steep correction.
* ONGC to gain if gas deregulated in improving global gas price environment: ONGC’s gas price is set to fall to US$2/mmbtu from Oct’20 under the prevailing formula. However, press reports indicate JKM spot LNG price may be set as the floor for its gas price. This may mean ONGC’s FY22E gas price may be US$3.6- 4.2/mmbtu depending on discount to JKM price and imply 20-37% upside to our EPS estimate. Low LNG liquefaction capacity addition means JKM spot futures for FY22-FY26E are at US$5.2-5.8/mmbtu vs US$4.7-4.1/mmbtu in FY20-FY21E.
* Outlook good for gas transmission; GAIL’s gas marketing outlook better in FY22-FY24E: Gas volume growth outlook for GAIL and GSPL is good. Tariff reforms and unified tariff may bring gains for GAIL. GAIL’s gas marketing EBITDA loss is estimated at Rs5.1bn in FY21E but positive EBITDA of Rs2.9-12.4bn in FY22-24E at Henry Hub and Brent futures; EBITDA would be higher at Rs9-25.7bn at Brent of US$50-60/bbl. We have cut GAIL’s FY21-FY22E EPS by 29-7% on gas marketing cut and target price by 13% to Rs88/share but retain our HOLD rating.
* Rise in domestic gas output and LNG import overcapacity in Gujarat may hurt PLNG’s volumes and margins: Dahej volumes may be hit by rise in domestic gas output of 45-50mmscmd in the next 3-4 years and LNG overcapacity in Gujarat as 10mmtpa capacity is added in CY22. Dahej margins are also likely to be lower on new volumes that replace RasGas contract that expires in CY28. There is also risk of further Kochi regas charge cut. Factoring volume and margin concerns has led to cut in PLNG’s FY21-22E EPS by 5-1% and target price by 13% to Rs225.
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