India wants to raise the contribution of natural gas to the overall energy basket of the country to 15 per cent by 2030 from around 6 per cent currently, as Prime Minister Narendra Modi looks to make the country a leader in the fight against climate change.
It is a well-established fact that gas scores over coal and oil when it comes to lower carbon emission, even though questions remain over its conflict with the overall theme of decarbonisation of the economy.
“The switch from coal to gas is generally seen as the means to rapid reduction in CO2 emissions. Typically, natural gas emits 50-60 per cent less CO2 when combusted in an efficient power plant compared with emissions from a typical coal plant,” said think tank Observer Research Foundation in a recent paper.
Brokerage firm Nomura Financial Advisory and Securities India believe stocks of city gas distribution companies will be the right way to play the theme in the stock market, as they benefit the most from the government’s crackdown on pollution in the country, which has risen to alarming levels.
As the focus on curbing pollution is increasing, support is rising. CGDs get the highest priority on cheap domestic gas, whereas alternates have high taxation, and coal and fuel oils are being banned, the brokerage firm said in a recent note.
India recently issued several licences to companies to expand the network of city gas distribution in the country, an effort that will be accelerated with the completion of the phase-I Urja Ganga pipeline in eastern India and commissioning of the Kochi-Mangalore gas pipeline in southern India.
Moreover, the unified gas pipeline tariff regulations announced by the Petroleum and Natural Gas Regulatory Authority in late 2020, will help city gas distribution firms to expand their networks to the hinterland by offering cheap piped natural gas to consumers and industries.
Credit Suisse Securities India believes a combination of the new unified tariff and the improving connectivity in the eastern region of the country would make gas sourcing very easy through any of the ports, and hence allow easy switching to gas for a number of industries.
On the supply-side, the outlook for natural gas production in the country should improve now as Reliance Industries-BP has started production from the deepwater fields in the Krishna-Godavari basin.
RIL expects the three deepwater fields in the eastern offshore of the country to produce enough natural gas to meet 15 per cent of India’s demand by 2023.
While the energy sector in India is generally perceived to be highly regulated and taxed, city gas distribution is like an oddity as the regulatory overhang on the sector is more benign, say analysts. “India’s city gas distributors are effectively monopolies in their respective areas of operation. The regulator has no say on tariff or end-prices, and open access regulations are benign,” Nomura India said.
The PNGRB’s loss in a tariff-related case by Indraprastha Gas in the Supreme Court in 2015 significantly harmed the regulator’s efforts to impose control over tariffs in the sector.
However, there were concerns that the open-access regulations brought out by the regulator last year could significantly hurt the monopoly status of some of the city gas distributors by ramping up competition, but the notified norms aren’t as strong as was envisaged earlier.
The notified norms will significantly dilute the competitive threat from oil marketing companies for CNG business. This is a major positive for Indraprastha Gas and Mahanagar Gas, as around 75 per cent of their volumes and even higher share of profitability come from the CNG segment, brokerage firm JM Financial said in a recent note.
The setting up of a permanent commission to tackle air pollution in the National Capital Region and concerted efforts of the government to nudge certain industries to adopt the use of natural gas as a fuel source is expected to sharply drive volume growth for the sector.
“We believe CGD segment volume growth can sustain at 12-14 per cent…Overall, we expect consumption to increase as volumes pick up in upcoming CGDs that have been licensed in recent years,” Nomura India said.
The government’s focus on electric vehicles could potentially act as a major threat to the sector, however, analysts believe that adoption of the electric vehicles in the country is likely to be slow despite the government’s ambitious targets.
Money managers also point to the looming threat that government intervention may increase going forward, especially, on the pricing of natural gas. But, analysts suggested the visibility of those threats is minimal at the moment.
Investors have started to factor in the potential high growth as shares of Mahanagar Gas, Indraprastha Gas, Gujarat Gas, and Adani Gas have risen 33-93 per cent in the past three months.
Going ahead, investors will await signs of robust demand traction to further, raise their bets on a sector that is closely interlinked with the transition to a more environmentally sensitive economy.