Street retains faith in city gas firms on good Q3, hope of natural gas under GST
City gas distribution companies continue to be in the spotlight. After a strong December quarter performance, and the government’s commitment to bring natural gas under the Goods and Service Tax regime have raised investor confidence in these companies.Stock prices of Gujarat Gas Ltd, Mahanagar Gas Ltd, and Indraprastha Gas Ltd (IGL) have gained up to 36% in February. Gujarat Gas saw maximum gains, while IGL's rise was at the slowest pace.Also Read Bitter home truths for migrant workersNatural gas coming under the ambit of GST can bring dual benefits to GCDs. Not only can the companies charge input credit tax on operating expenses but there will be a positive rub-off impact on the demand. Industrial consumers will be able to take the input tax credit, thus lowering their gas feedstock cost. Gas remains a cheaper option compared to other fuels, and the input credit will make it more competitive, pushing up demand.“The input tax credit (ITC) benefit is a more tangible positive as same has been a burden and with the convergence of tax regimes, same can be recovered," said analysts at Emkay Global Financial Services Ltd. Their rough-cut calculations, using operating expenses and cost of goods sold for city gas, the distribution suggests positive earnings per share impact from ITC, 7% each on IGL/Gujarat Gas (Rs150 crore/ ₹140 Crore EBITDA impact) respectively.Amongst the three, Gujarat Gas has maximum exposure to institutional sales (80% of volumes during Q3). Hence, Gujarat Gas is looked at as the key beneficiary of the move through demand boost even as all three companies benefit.The outlook for CGD’s otherwise too remains strong. Rising gas demand and increasing network are supportive of the growth momentum the companies are seeing. The actions on pollution curbs mean more demand for natural gas from industries and automobiles. Being a cleaner and cheaper fuel, rising piped gas infrastructure is driving household demand too.The third quarter held testimony. Gujarat Gas's strong EBITDA growth of 66% YoY was driven by 23% YoY volume rise. IGL’s EBITDA rise of 28% YoY was due to an all-time high margin (up 37% YoY). Analysts believe IGL’s margin could expand further in Q4FY21 given recently hiked compressed natural gas (CNG) prices, while retaining a 25% cut in gas input price.MGL’s EBITDA too had surged 22% YoY with strong expansion in gross margin (up 27.6% YoY).IGL’s expanding network and strong demand from Delhi NCR bode well. The stock, however, is trading at premium valuations (29.7 times FY22 earnings estimates) compared to Gujarat Gas trading at about 24.6x.There is also some concerns about a hike in rentals for IGL outlets soon. OMCs are in talks with CGDs to increase commissions to sell CNG at their retail outlets. For Gujarat Gas, the rising spot liquified natural gas prices can have some impact on margins moving forward. The same remains watched for.For MGL, the resurge in covid-19 cases in Mumbai can keep a check on CNG volume growth moving forward.