Will City Gas Distribution become an interesting investment theme?

A study conducted by the Central Pollution Control Board has brought out some startling facts.

Out of the 65 cities it examined, the air quality in 60 cities was miserable.  The problem of air pollution in some areas is so severe that citizens are thinking about migration. Case in point is Delhi. Nearly 35% of its residents showed their willingness to migrate to other cities on account to escape air pollution.

Who’s to blame?

Well, the factors are many and would merit a separate discussion. But India’s energy mix is undoubtedly one of the primary reasons.

Source: Petronet LNG

Coal is one of the most polluting energy sources. Thus reducing its dominance in India’s energy pie is a must. Clearly, the share of natural gas and renewables, which are considered environment-friendly energy sources, has to go up.  The Indian government has been working on improving the share of natural gas in the country’s energy pie from 6% in 2017 to 20% in 2025.

Source: Niti Ayog, PNGRB

In the recently conducted 9^th round of City Gas Distribution (CGD) auction, the government awarded new distribution licenses in 84 geographies across the country. In the 10^th round of CGD the government is planning to award licenses in 50 more geographical areas.

Will this open up investment opportunities for investors?

India’s natural gas consumption is expected to double in the next 8 years, on the back of proposed changes in the energy mix. At present, the energy demand is growing at 4%-5% annually. In other words, the natural gas sector is likely to grow at twice the rate of growth in India’s overall energy consumption.

Against this backdrop, CGD looks like an interesting area from an investment perspective for the medium term. So far, the network of CGD has a footprint only in the NCR, Gujarat and Western Maharashtra regions. The Indian government has set an ambitious target of spreading the CGD network to 50% of India’s geographical areas. This will cover 22 of India’s states.

Why may CGD be a space worth tracking?

• At a time when, the demand is expected to grow consistently, the business model of CGD operators looks attractive since it offers them higher operating leverage, wherein the fixed costs earn them higher revenues—similar to that of subscription-based
• The demand is inelastic and, therefore, any change in price would have a very minimal effect on consumption

Out of these, PNG Domestic (PNG-D) may offer lucrative investment opportunities.

(PNG-D) caters to the mass market where the demand is inelastic. Change in price won’t make any significant difference to sales volume/quantity of the product. Unlike the PNG Industrial (PNG-I) segment, where the industries shift to coal in the case of a rise in gas prices, no household shifts to coal for cooking food in the event of a similar higher gas price scenario. Therefore, gas distribution companies with a higher PNG-D business might enjoy stable margins.

Air pollution is an adversity today, but as they say, every adversity comes with a masked opportunity.

Companies operating in (PNG-D) space

1) Indraprastha Gas Ltd

2) Mahanagar Gas Ltd

3) Gujarat Gas Ltd

4) Adani Gas Ltd

How many of them will benefit from India’s proposed shift in the energy mix. Let’s wait and watch.

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