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We expect markedly stronger prospects for Indian gas companies in FY24E, helped by i) rising domestic supplies, ii) moderate LNG costs, iii) probability of resumption of liquid fuel price hikes by OMCs and iv) stronger prices of industrial fuel alternatives (propane, FO, naphtha). The combination of more affordable gas prices and therefore, a stronger margin environment as well as the potential to drive gas demand higher is a material positive for demand over FY24-25E. We see ~20mmscmd of additional gas supply from domestic sources over FY24-25E, with management guidance for both ONGC and RIL (sources of this supply) suggesting the plateau period for these new fields at 2-3 years. Given an estimated requirement of ~35mmscmd of spot LNG in FY24E (extrapolating from current year), these additional domestic volumes will switch gas priced @US$20- 25/mmbtu with US$12/mmbtu gas to the extent of ~60%, a huge change for Indian sourcing mix and margin profiles. We remain positive on select CGD names like IGL & MGL with a more cautious ADD on GGL, while for gas utilities, GSPL (BUY), GAIL (BUY) and PLNG (HOLD) is the preferred pecking order.

* Weather and inventory come to the rescue of gas prices: Unusually warm weather in most parts of Europe, coupled with aggressive fill-up of gas storage in H2CY22 and weak demand in Asia have kept gas prices in check over Dec’22- Feb’23. Because of these developments, JKM LNG futures seem to be implying a moderate gas price environment over the next 6-9 months, which is good news for Indian gas consumers. Our sense is that Asian spot LNG prices will continue to hover at

* Global supplies remain constrained, new domestic fields can provide succor: Prospects for global LNG supply growth are limited given 1) most of Qatar’s additional capacity of 33mt (commissioning by CY24E) is already sold off to China, and 2) limited traction is expected from the US and Australia at least over the next 18-24 months. Additionally, with the reopening of China, further Russian supply disruptions and European inventory rebuild over H2FY24E, pricing of LNG will remain tight. Having said that, the start-up of the new MJ-1 field from RIL and the KG 98/2 field of ONGC should add ~20mmscmd to Indian supply by CY25E and that may help insulate Indian companies from LNG tightness to a certain extent, in our opinion.

* Moderate costs + demand recovery seen over FY24E: We estimate that the 3 city gas distribution companies (CGDs) will see volume growth of 6.1% (IGL) and 6.4% (MGL), while Gujarat Gas is likely to see stronger growth of 17.3% owing to a steep change in Morbi and a very low base of FY23E. On the margin front, however, the improvement is uniform vs FY23E, with EBITDA/scm for IGL/MGL/GGL at Rs6.9/10.3/7.1 per scm . This translates to a steady 12/19/4% CAGR in EPS over FY23-25E for IGL/MGL/GGL, and underpins our target price of Rs535/1050/554 per share for IGL/MGL/GGL, respectively, and our recommendations of BUY for IGL, BUY for MGL and ADD for GGL.

* Key upside risks: i) Higher-than-expected decline in LNG prices, ii) resumption of price increase in petrol and diesel, iii) stronger regulatory push for gas conversion

* Key downside risks: i) Further disruption in Russian gas supplies to Europe, ii) faster recovery of Chinese demand for oil and gas, iii) sudden reversal of weather patterns in Europe. And/or a more aggressive inventory buildup for CY24E.

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