Indian Gas Sector - Rising domestic gas supply to benefit gas utilities - HDFC Securities

Mr. Harshad Katkar, Institutional Research Analyst, HDFC Securities and Mr. Nilesh Ghuge, Institutional Research Analyst, HDFC Securities

The KGD6 consortium has sought bids from customers as it intends to sell additional 5.5mmscmd of gas from the KGD6 block in the Krishna Godavari (KG) Basin, off the eastern coat of India. The additional gas will be available for sale at the delivery point at Gadimoga, near Kakinada, tentatively from the last week of April or early May 2021. Oil and Natural Gas Corporation (ONGC) has also floated the tender for prospective buyers to bid for gas supplies from its KG-DWN-98/2 field in the KG Basin offshore. The company will supply 2mmscmd of gas from the field to the Odalarevu onshore terminal in Andhra Pradesh, which should commence from June 2021. This increasing gas supply from domestic sources should drive earnings growth and valuations for the Indian gas utilities, especially the gas transmission companies.

Tenders to sell gas from the KG Basin indicate that ramp-up in domestic gas production is faster than investor expectation. : The tenders from the KGD6 consortium and ONGC to sell gas from KG Basin underscores our thesis of rising domestic gas production, highlighted in our report "Indian Gas Sector - Looking Beyond the Pandemic" dated 2 August 2020. These and earlier tenders indicate a total increase of about 20mmscmd (23% of FY20 domestic supply) in supply of gas from domestic sources over Dec 2020 to July 2021.

The KGD6 consortium has already signed the Gas Sales and Purchase Agreement (GSPA) with buyers to sell 4.8mmscmd and 7.5mmscmd of gas from KGD6 Basin in November-19 and February-21 respectively. The consortium has commenced gas production from R-cluster, an ultra-deep water gas field, in December-20. R-cluster is the first of the three projects to come on stream. The production from Satellites Cluster and MJ field is expected to start by mid-CY21 and CY22 respectively. Peak gas production from the three fields is expected to be ~30mmscmd by CY23. ONGC has commenced gas production from KG-DWN-98/2 in March-20. It is expected to reach 3mmscmd in FY22 and further ramp up to 15mmscmd by FY24.

Price of new KG Basin gas capped by government fixed ceiling: Bidders for the gas from R-Cluster have to quote a price linked to Platts JKM (Japan Korea Marker), the LNG benchmark price assessment for spot physical cargoes. The lowest bid that can be placed is JKM minus USD 0.3/mmbtu. The highest acceptable bid would be JKM plus USD 2.01/mmBtu. However, they will be entitled to a maximum of USD 3.62/mmbtu ceiling fixed by the government for a six-month period from Apr-Sep 2021. ONGC will sell gas at the government-determined ceiling price, which is USD 3.62/mmbtu for the six-month period from Apr-Sep 2021.

Gail and Gujarat Gas are our preferred picks: We expect a 16% CAGR in gas supply from domestic sources and a 12% CAGR in Indian natural gas demand over FY21-23E to drive earnings growth CAGR of up to 25% (FY21-FY23E) for our top picks Gail and Gujarat Gas (GGL). It should lead to stock price upside potential of over 18-28% for our top picks GAIL and GGL. On FY23E, GAIL is trading at a PER of 7.2x and GGL at 18.2x. By FY23E, vs FY21E, operating cash flows should improve by up to 173% and FCF yield should increase up to 630bps for these two companies.

Source : Equity Bulls

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