India’s Gas Demand Is Likely To Grow Like Never Before

Natural gas consumption is expected to grow in India over the next few years, aided by rising industrial usage and as more households switch to the gaseous fuel for cooking and transportation.That’s according to Haitong International Research, which expects domestic consumption of the fuel to grow at an annualised rate of 7.4% during FY2021-25—more than thrice over the preceding four-year period. And companies like Gujarat Gas Ltd., Indraprastha Gas Ltd. and GAIL India Ltd. are likely to benefit from it.The research firm, in its report, attributed the trend in particular to industries like gas-based fertiliser makers among others expanding capacity, penetration of city gas distribution networks in new districts and refining capacity addition.The Prime Minister Narendra Modi-led administration aims to double gas’ share to 15% in the country’s energy mix by 2030 that would curb air pollution and promote use of the cleaner fuel. As many as 14 out of the world’s 30 most polluted cities are in Asia’s third-largest economy, according to a World Bank study.ICRA Ltd. sees gas demand growing in FY22 owing to commissioning of new fertiliser plants and offtake by city-gas distributors, led by expansion in pipeline network and new liquefied natural gas terminals.'CGD demand is driven by favourable economics of conversion given domestic gas allocation for PNG(D) and CNG segments,' the rating agency said in a recent report. 'The PNG (industrial and commercial) segment though supported by the ban on petcoke and furnace oil continues to face competition from alternative fuels.'Most companies in the gas utilities sector enjoy regulatory protection and have dominant competitive position besides healthy margins, liquidity and strong financial flexibility, ICRA said.Here’s what the Haitong report said:City Gas DistributionThe sector’s gas demand will double in the next five years, with newer areas and better connectivity likely to boost volumes.The sector has reached 53% of India’s total geographical area covering 70% of its population. This comprises 16.7% of India’s total natural gas consumption at present—from 14.4% four years ago. It’s expected to hit 24% by 2021-22.Volumes are expected to grow at an annualised rate of 18% during FY21-25, compared to 6% in the last four years.Fertiliser SectorThe fertiliser sector is expected to add six million tonnes in additional capacity over the next four years. Several gas-based urea projects are under implementation across India—most of which will be commissioned in FY22.These projects are expected to generate additional demand of 12-13 million metric standard cubic metres per day over the next three years.Refining Capacity, ProductionState-run Hindustan Petroleum Corp. and Indian Oil Corp. have announced refining capacity addition plans till FY24, and are adding petrochemical capacities at various locations. Haitong expects additional gas demand of 7 million tonnes once these projects get commissioned.Domestic gas production is expected to grow on average at an annualised rate of 17% over the next two years and 8% during FY21-25. That will be driven by a ramp-up in production in the Krishna Godavari Basin by Reliance Industries Ltd. and Oil and Natural Gas Corp.That’s, however, expected to negatively impact imported liquefied natural gas volumes in the near term, which grew at an annualised rate of 7% in the last four years.Reliance Industries is developing its discoveries at the KG basin in three fields—R-Cluster, satellite field and MJ. Production has started at the satellite field and will commence at MG field from the second half of 2022. The company has guided for peak output of 30 mmscmd in 2023. In comparison, ONGC’s production is expected to rise to an average of 8.5 mmscmd in FY23.Gas Prices Haitong expects gas prices under the administrative pricing mechanism to increase 70% to $3.1 per metric million British thermal units in October, as the benchmarks rise. ONGC, too, expects domestic gas prices to rise 50-60% in October.The rise in APM prices will have a mild impact on consumers like city gas distributors as widening price gap between petrol or diesel with CNG will provide such firms enough pricing power to hike prices while keeping their gross margins intact.CGD companies enjoy access to low-cost CNG and domestic PNG, currently over 65% cheaper than petrol and diesel.Even as demand will be boosted by industrial volumes and concerns over deteriorating air quality in the near term, the rise of electric vehicles may dent volume growth in the long run. The running cost of electric vehicles is cheaper by 43-74% over CNG, and is expected to widen further in the second half of 2022, when natural gas prices get hiked.Company CommentaryGAIL is likely to benefit from higher gas volumes and increasing crude oil and spot LNG prices. Haitong’s target price for the company is Rs 195—an upside of 28% from its current market price.Gujarat Gas volumes will grow in double digits over the next few years amid expansion and higher utilisation at the Morbi ceramic cluster in Gujarat, sustainable growth in newer areas and higher industrial demand owing to economic growth. The report provides a target price of Rs 790—implying an upside of 19%.Indraprastha Gas will be supported by higher CNG penetration, expected growth in PNG by domestic and industrial consumers, and deteriorating air pollution levels that increases demand for cleaner fuels like CNG. The report provides a target price of Rs 630, implying an upside of 12%.The report remains neutral on Petronet LNG Ltd. (target price: Rs 252, upside: 13%), Gujarat State Petronet Ltd. (target price: Rs 370, upside: 12%), and Mahanagar Gas Ltd. (target price: Rs 1,250, upside: 9.8%) owing to their limited volume growth opportunities.RisksThe report cites lower domestic supply from the KG basin and surge in spot LNG and crude oil prices as key risks for India’s gas sector.

India’s Gas Demand Is Likely To Grow Like Never Before

Natural gas consumption is expected to grow in India over the next few years.

IPO Market Split: QIBs Dominate Mainboard, Retail Investors Drive SME Listings In August

RECOMMENDED FOR YOU

CFO Leaders: The Making Of Five Star CFOs

Stocks Rise, Treasuries Fall on Stimulus Bets: Markets Wrap

Stocks End Record-Setting Week With Further Gains: Markets Wrap

The Mutual Fund Show: The Dos And Don’ts Of Online Investing

POPULAR

India’s Gas Demand Is Likely To Grow Like Never Before

Natural gas consumption is expected to grow in India over the next few years.

IPO Market Split: QIBs Dominate Mainboard, Retail Investors Drive SME Listings In August

RECOMMENDED FOR YOU

CFO Leaders: The Making Of Five Star CFOs

Stocks Rise, Treasuries Fall on Stimulus Bets: Markets Wrap

Stocks End Record-Setting Week With Further Gains: Markets Wrap

The Mutual Fund Show: The Dos And Don’ts Of Online Investing

POPULAR

Trade Setup For Sept 17: Nifty Likely To Extend Gains, Key Resistance At 25,500

Groww IPO: Microsoft CEO-Backed Firm Files Updated DRHP; Eyes Fresh Issue Worth Rs 1,060 Crore

Gujarat Fluorochemicals Bulk Deal: Promoter Likely To Offload Stake Worth Rs 455 Crore

Nepal Interim PM Sushila Karki To Dial PM Modi In First Foreign Outreach Post Taking Charge

DreamFolks Shuts Down Domestic Lounge Operations