Which companies might be the beneficiaries of 11th round of CGD?
Petroleum and Natural Gas Regulatory Board (PNGRB) concluded the 11th round of City Gas Distribution (CGD) bidding on December 22, 2021. The government might announce the list of successful bidders sometime this month.
Besides Public Sector Undertakings (PSUs), private sector players such as Adani Total Gas and Torrent Gas participated aggressively in the bidding process.
These are exciting times for India’s gas economy. Are you wondering why?
If you visit any CNG filling station in Mumbai and in the peripheral areas, you will notice a prominent trait—long and impatient queues. For intercity rides, spotting CNG stations at highways can be a difficult task at times.
Now imagine how we are going to deal with EV recharging at public stations considering the long turnaround time. Well, technologies can evolve very fast and the time economics might improve significantly going forward. But it looks like CNG-enabled hybrid vehicles are likely to dominate in the foreseeable future.
As India endevours to increase the share of natural gas from ~6% at present to 15% by 2030 in the country’s energy mix, improving the CGD penetration holds the key.
So far the country’s CGD infrastructure is unevenly distributed. For instance, India has just 3,532 CNG stations as of now; of which 840 are in Gujarat alone, according to the data published by the Petroleum and Natural Gas Ministry. Maharashtra and Uttar Pradesh have just 490 and 509 CNG stations respectively.
But can you imagine there are just 63 CNG stations in Tamil Nadu which is considered to be an auto hub of India? And a large state like Madhya Pradesh has only 120 CNG filling stations.
Moreover, densely populated states such as West Bengal and Tamil Nadu don’t have any domestic PNG connections so far.
On this backdrop, 11th round of CGD is important since it is expected to iron out the geographical disparities in the CGD infrastructure. Besides creating employment, the government expects that the 11th round of CGD might encourage the investments of Rs 80,000 crore in the Indian economy.
Is there any takeaway for the stock market investors?
You see, our research team has already published a detailed report on Adani Total Gas. According to which, the gas volumes of the company might grow at a CAGR of 41% between FY21 and FY24.
The report argues that there’s a 19% upside potential over the recommended price of Rs 1,685. Interestingly, our analysts haven’t factored in the potential wins from the 11th round of CGD bidding. Can there be any upside risk to the company’s earnings estimates? Keep tracking the updates of our research team!
But there’s one more interesting angle to the CGD story.
You see, CGD volumes account for nearly 15% of India’s total natural gas consumption. And CGD is going to be a major growth driver for the sector in the foreseeable future.
So why not focus on a company that operates across the value chain of natural gas? Thus, it could be interesting to track GAIL (Gas Authority of India Limited) here onwards.
GAIL has a 75% market share in the natural gas pipeline network of India and it operates nearly 54% of India’s CNG stations through CGD JVs (Joint Ventures) and GAIL Gas.
For now, the contribution of GAIL Gas in the consolidated revenue of GAIL is fairly low—i.e. about 7%. However, as and when the CGD infrastructure development envisaged under the 9th, 10th and 11th round comes on stream over the next 3-5 years, the contribution of GAIL Gas might improve substantially.
Apart from natural gas transmission and marketing, and CGD; the company also has a presence in other verticals such as petrochemicals, liquid hydrocarbons, exploration and production and renewables amongst others.
Eleventh round of CGD bidding made it clear that India’s gas economy is taking a positive step forward, leaving the regulatory uncertainties behind. India’s commitments on the climatic changes front might keep the natural gas sector in the limelight for the next few years.
Notably, the stock price performance of GAIL has been showing some revival of late.
In a nutshell
Clean energy is the need of the hour and a popular theme on Dalal Street. Just that, EVs are already in the limelight but the Street so far seems to have given a cold shoulder to the gas economy players. Will this scenario change in the near future?
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