Gas distribution sector in India
Introduction
According to a report in FY20, India has again topped the annual list of cities in the world with the worst air quality. In fact, 21 out of the top 30 worst polluted cities are from India.
Ghaziabad is ranked #1 in the worst polluted city in the world. I don’t know about the credibility of these numbers. But one thing I know. The pollution level in India is really bad. And it is getting worse day by day.
Now, the question is - What can be done about it? Of course, we can’t stop the vehicle movement. But one thing that can be done is the replacement of petrol diesel with cleaner fuel i.e. Natural gas. Indian cities can no longer afford to have vehicles releasing high levels of sulfur dioxide and it has become critical for more and more private vehicle owners to switch to natural gas for fuel needs. And that creates a huge huge demand for gas distribution in the country.
In this article, we will start with understanding what is natural gas and the type of natural gas, the natural gas sector in India, key companies in the sector. Then we will briefly discuss Indraprastha Gas Limited, Mahanagar Gas Limited, Adani Total Gas, and Gujarat Gas. Finally, we will do a financial comparison of each of the 3 companies on market size, stock return, growth ratio, profitability ratio, debt to equity, and valuation ratio. Before doing a stock comparison, first of all, let’s understand what exactly is Natural gas and why it is helpful?
Natural gas is a fossil fuel – but it’s cleaner and more efficient than other traditional fuels like coal and oil. Natural gas produces less pollution and greenhouse gases than its counterparts. For example, when natural gas is burned, it produces 45 percent less carbon dioxide than coal, 30 percent less than oil, and 15 percent less than wood. Type of natural gas:
- CNG: Compressed natural gas. It has usage in automobiles like auto, car, etc.
- PNG: Piped natural gas. It is used for domestic household consumption as well as commercial and industrial use.
Now, before we even compare the companies in the gas distribution sector, we will understand more about this natural gas sector.
Natural gas Sector in India:
- India has a high potential for gas demand and It is expected to be one of the largest consumers of natural gas globally.
- Currently, natural gas contributes only 6.2% of entire energy consumption in India. But the Indian government is keen on increasing natural gas consumption to 15% by 2030 to cut carbon emissions in the country.
- Investment worth billions of $ have been made to increase natural gas consumption.
- India's natural gas demand is set to grow at a CAGR of 8 percent and the Indian government is trying to increase access to gas to about 70% of the population by 2025.
- There is a huge amount of pipeline infrastructure being built around and it is set to grow 4 times the current level by 2025. CNG stations are going to increase 3 times of current level by 2025. Indian gas regulator PNGRB has granted licenses to 136 geographies in the past two years, which will help sustain higher city gas volumes over the next decade. In fact, in the latest budget of 2021, Finance Minister has declared that the government will add 100 more districts to the City Gas Distribution Network in the next three years.
- Approximately 76% of the CNG stations and around 80-90% of the PNG connections are concentrated in Delhi, Gujarat, and Maharashtra.
- Major gas distributor companies: MGL, IGL, Gujarat Gas, and Adani Gas
Please be clear that here we are only talking about gas distribution companies. We are not talking about the gas producers. So IGL, MGL, and Gujarat gas are CGD players i.e. City Gas Distributors. Their task is to distribute the CNG and PNG gas across the city for domestic and industrial use as well as for vehicles by building a distribution network. Each of them operates in a separate geographical area or GA.Established in 1995, Mahanagar Gas Limited is a joint venture between GAIL, BG group, and the government of Maharashtra.
Over the last 26 years, MGL has established a firm presence where MGL connects 1.2 million households as well as over 4000 small commercial and industrial establishments in the Greater Mumbai gas distribution business where it enjoys a monopoly. Its growth is driven primarily by the CNG category, which currently drives 70-75% of its revenues. The company also supplies PNG to industrial, commercial, and residential/domestic segments. There is an estimation that over 75% of households in Maharashtra are now using Mahanagar Gas's pipelines. MGL has put in place large plans to augment its gas distribution network in the existing Mumbai region as well as the surrounding regions. It is currently expanding in the Raigad district.
Indraprastha Gas (IGL)
It was set up in 1998 by GAIL, BPCL, the Government of Delhi. IGL is the exclusive distributor of CNG and PNG in the National Capital Territory of Delhi with CNG constituting 74% of the company’s total sales volume in FY2019. Going forward, IGL has sizeable expansion plans in the NCT region as well as expanding its presence in NCR (Noida, Greater Noida, Ghaziabad, and Gurugram) as well as other geographical area such as Haryana, Rajasthan, and UP.
In 2013 the company acquired a 50% equity stake in Central UP Gas Limited (CUGL). CUGL is the authorized CGD operator at Bareilly, Jhansi, Unnao, and Kanpur in Uttar Pradesh. In 2014, the company acquired a 50% equity stake in Maharashtra Natural Gas Limited (MNGL). MNGL is the authorized CGD operator for Pune, including Pimpri-Chinchwad and adjoining contiguous areas of Hinjewadi, Chakan, and Talegaon in Maharashtra. This has resulted in a wider reach of IGL.
Gujarat Gas (GGL)
It is India's largest CGD Company, with 25 CGD licenses spread across 42 districts in 6 states and 1 Union territory across the states of Gujarat, Maharashtra, Rajasthan, Haryana, Punjab, and Madhya Pradesh, and Union Territory of Dadra & Nagar Haveli.
As of March 31, 2020, the Gujarat gas user base consisted of more than 14.4 lakh domestic households, 3700 industrial units, 12,600 commercial establishments, and 403 CNG stations.
GGL has demonstrated a healthy track record of supplying gas in its authorized GAs, wherein it has been able to grow its customer base, despite competition setting in from alternate fuels.
Adani Total Gas
Incorporated in 2005, Adani Gas is involved in the marketing and distribution of natural gas (piped and compressed). AGL currently supplies piped natural gas (PNG) to industrial, commercial, domestic customers and compressed natural gas (CNG) to the transport sector in the areas of Ahmedabad, Vadodara, and Faridabad. It has also recently started its operations in Khurja and has also set up pipeline infrastructure in the cities of Udaipur, Jaipur, Noida, and Lucknow.
Financial Comparison
- Market Cap: If we look at the market cap, Indraprastha has a market cap of ~ Rs 36,000 Cr, Mahanagar Gas has a market cap of Rs11,460 Cr, Gujarat Gas has a market cap of Rs 35,190 Cr, and Adani Total Gas has a market cap of Rs 100,770 Cr. So in terms of market cap, Adani Total Gas is #1, Indraprastha is #2 and it is followed with Gujarat Gas at 3rd position and Mahanagar Gas is #4.
- Last 5-year stock returns: If we look at the stock return in the last 5 years, Indraprastha's share has zoomed from Rs 112 in April 2016 to the current levels of Rs 502 at a CAGR of 35%. Mahanagar Gas share has jumped from Rs 520 in July 2016 to the current at Rs 1132 at a CAGR of 19%. Gujarat Gas share has jumped from Rs 108 in April 2016 to currently at Rs 506 at a CAGR of 36%. Adani Total Gas recently had its IPO in Nov 2018 at a price band of Rs 72. Since then it has zoomed to the current level of Rs 900 at an insane CAGR of 175%. In terms of returns in the last 5 years, the #1 stock is Gujarat gas and Indraprasth gas, and then Mahanagar gas. We can’t compare Adani Gas as it has recently debuted in Nov 2018. However, it has given bumper returns since its listing.
- Revenue: If we look at the revenue in the last 5 years, Indraprastha revenue has increased from Rs 3,686 Cr in Mar 2016 to currently at Rs 4,943 Cr by Dec20. Mahanagar Gas revenues have increased from Rs2,078 Cr to currently at Rs 2,121 Cr by Dec20. Gujarat Gas revenue has been increased from Rs 6,106 Cr in Mar 2016 to Rs 6,552 Cr by Dec20. Adani Total Gas revenues have increased from Rs 1,129 Cr in Mar 2016 to currently at Rs 1,573 Cr by Dec20. As per the latest revenue figure, Gujarat Gas is #1, Indraprastha is #2, Mahanagar Gas is in 3rd position and Adani Total Gas is at #4.
- Revenue growth in last 5 years: In terms of revenue growth since Mar 2016, Indraprastha revenues have grown at a CAGR of 6.37%, Mahanagar Gas revenue has grown at a CAGR of 0.43%, Gujarat Gas revenues have been grown at 1.49% and Adani Total Gas revenues have grown at a CAGR of 7.23%. So in terms of revenue growth, Adani Total Gas is #1, Indraprastha is #2 followed by Gujarat Gas at #3, and then Mahanagar Gas. This lower growth in revenue is also due to COVID.
- Profits: If we look at the profits since Mar 2016, Indraprastha profits have increased from Rs 458 Cr to currently at Rs 1,088 Cr by dec20. Mahanagar Gas profits have increased from Rs 311 Cr to currently at Rs 573 Cr by Dec20, Gujarat Gas profits have increased from Rs 188 Cr to Rs 925 Cr by Dec20. Adani Total Gas profits have increased from Rs 81.48 Cr to currently at Rs 440 Cr. As per the latest profit figure, Indraprastha is #1, Gujarat Gas is #2 and it is followed by Mahanagar Gas at #3 and Adani Total Gas is at 4th position.
- Profit growth in last 5 years: In terms of profit growth since Mar 2016, Indraprastha profits have grown at a CAGR of 19.98%, Mahanagar Gas profits have grown at a CAGR of 13.73%, Gujarat Gas profits have grown at a CAGR of 39.86% and Adani Total Gas profits have zoomed at a CAGR of 42.8%. So in terms of profit growth, Adani Total Gas is #1, Gujarat Gas is #2 followed by Indraprastha at #3, and then Mahanagar Gas at #4.
- ROE: If we look at the return on equity, Indraprastha's latest ROE for Dec20 stood at 23.31%. Mahanagar Gas ROE is 26.89%, Gujarat GasROE stood at 36.26% and Adani Total Gas ROE stood at 29.64%. So Gujarat Gas is #1 in terms of ROE, Adani Total gas is #2. It is followed by Mahanagar Gas at #3 and Indraprastha is at 4th position. All 4 companies have good ROE.
- ROCE: If we look at the return on capital equity, Indraprastha's latest ROCE for Dec20 stood at 28.68%. Mahanagar Gas ROCE is 32.81%, Gujarat Gas ROCE stood at 27.57% and Adani Total Gas ROCE stood at 25.45%. So Mahanagar Gas is #1 in terms of ROCE, Indraprastha is #2. It is followed by Gujarat Gas at #3 and Adani Total Gas is at 4th position. All 4 companies have excellent ROCE of above 20%.
- Debt to equity: If we look at the latest debt to equity ratio, Indraprastha's debt to equity is 0.02 which is almost debt-free. Mahanagar Gas also has a negligible debt to equity of 0.02. Gujarat Gas also has a very low debt to equity of 0.56. Adani Total Gas has a debt to equity of 0.27. So all 4 companies are comfortably placed in terms of their debt to equity ratio.
- Promoters shareholding & % change in promoters shareholding: If we look at the promoters shareholding, Indraprastha promoters shareholding for Dec20 stood at 45%. Mahanagar Gas promoter shareholding stood at 32.50% and Gujarat Gas promoters shareholding stood at 60.89% and Adani Total Gas promoters shareholding stood at 74.80% So all 4 companies have a good amount of holding from promoters which shows the trust of promoters in the company. Please note that in the last 2 years, Mahanagar promoter shareholding has reduced by -24%. There is no change in promoter shareholding of Indraprastha, Gujarat Gas, and Adani Total Gas.
- Valuations: If we look at the valuations, Indraprastha's share is currently trading at Rs 502 at a PE ratio of ~32 whereas its median PE is ~30. That makes Indraprastha fairly valued at current levels. Mahanagar Gas share is currently trading at Rs 1132 at a PE ratio of ~20 whereas its median PE in 3-5 years is ~18. It means Mahanagar Gas is trading at a fair valuation. Gujarat Gas is currently trading at Rs 506 at a PE ratio of ~30 whereas its median PE is ~34. This makes Gujarat gas slightly undervalued. Adani Total Gas share is currently trading at Rs 900 at a PE ratio of ~217. That makes Adani Total Gas an extremely overvalued stock.
Conclusion Overall if we conclude, in terms of Market cap, Adani Total Gas is #1 followed by Indraprastha and then Gujarat Gas, and then Mahanagar Gas.
In terms of Stock return in the last 5 years, Gujarat gas and Indraprasth gas is #1 followed by Mahanagar gas. Adani gas can’t be compared as it was listed in Nov 2018. However, it has given a bumper return since its IPO.
In terms of revenue size, Gujarat Gas is #1 followed by Indraprastha and then Mahanagar Gas, and then Adani.
In terms of revenue growth in the last 5 years, again Adani Total Gas is #1 followed by Indraprastha and then Gujarat Gas and then Mahanagar Gas.
In terms of profit size, Indraprastha is again #1 followed by Gujarat Gas, Mahanagar, and then Adani Total Gas.
In terms of profit growth, Adani Total Gas is #1 followed by Gujarat Gas, Indraprastha, and then Mahanagar. So Adani Total Gas is the fastest-growing company in terms of profit growth.
In terms of the latest ROE, Gujarat Gas is again #1 followed by Adani Total Gas, Mahanagar Gas, and then Indraprastha.
In terms of the latest ROCE, Mahanagar Gas is #1 followed by Indraprastha, Gujarat Gas, and then Adani Total Gas. So is #1 in terms of profitability. Although, all 4 companies have good profitability.
If we look at the debt to equity, all 4 companies are comfortably positioned. In terms of promoters' shareholding, all 4 companies have a good amount of promoters' shareholding. Finally, in terms of valuation, Indraprastha and Mahanagar gas are looking fairly valued, Gujarat Gas is looking undervalued and Adani Total Gas is looking extremely overvalued.
If you ask me, I like Indraprashtha gas, Mahanagar Gas, and Gujarat Gas as they are currently available at attractive valuations.
PS: If you want to learn every aspect of fundamental analysis of stock and other important concepts of personal finance, you can explore my video course on "Everything about money management".
Disclaimer: This article is only for educational purposes. Consult your financial Advisor before investing your money.
Note: This article is co-authored by Sahil & Juhi. Sahil is the founder of this personal finance academy and Juhi is an investor and finance expert based out of the USA.
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