With the government’s focus on environment-friendly fuel, Indraprastha Gas, Mahanagar Gas and Suzlon’s earning prospects look bright
Starting October 1, the price of administered natural gas will fall from $3.06 per mmBtu (million British thermal unit) to an estimated $2.5 to $2.7, benefitting companies such as Indraprastha Gas and Mahanagar Gas as well as gas consumers. Internationally, too, gas prices have been running low, benefitting importers such as India. Prices are likely to remain soft, at least for the near future.
While this is a one near-term trigger, with rising thrust of the government on renewable and environment-friendly energy, the green energy segment is well poised to deliver strong growth in the coming years.
The Union government plans to quadruple renewable energy capacity to 175 GW by FY22 - 100 GW from solar, 60 GW from wind, 10GW from biomass and 5 GW from small hydro. An enabling environment, along with incentives, is expected to help set up new capacities in the renewables space.
All these will aid the growth of companies such as Suzlon Energy, Inox Wind, NTPC, PTC India, ABB India and Ujaas Energy. PTC India Financial Services is focused on lending to the renewables sector. Hence, it is a niche player in the banking and financial services sector.
The government’s thrust on environment-friendly fuels such as compressed natural gas (CNG) as well as on piped natural gas (PNG) augurs well for gas-distribution companies such as Indraprastha Gas and Mahanagar Gas.
While all these stocks offer good long-term investment opportunity, here is a refined list, based on companies that are likely to generate healthy earnings growth over FY16 to FY18, according to Bloomberg consensus estimates, as well as preferred picks of analysts.
Indraprastha Gas (IGL), which predominantly caters to the National Capital Region (NCR), has benefitted from the ban on diesel vehicles as well as the odd-even rule implemented in New Delhi. This has aided the company’s volumes in recent quarters.
The company recently won the bid to develop city gas distribution in the Rewari district of Haryana. Along with its acquisitions, namely Maharashtra Natural Gas and Central Uttar Pradesh Gas, will boost IGL’s volumes in addition to enabling it diversify beyond the NCR.
Given these strong fundamental triggers and under-penetration of both CNG and PNG, the stock could witness further re-rating. Addition of new CNG buses and adoption of green fuels in other markets are a few growth catalysts for IGL.
Mahanagar Gas is the exclusive gas distributor in Mumbai and adjoining areas. Its business model is similar to that of Indraprastha Gas with the exception of the recent acquisitions made by the latter. The company is a play on rising penetration of CNG and PNG and is also looking to bid for new cities coming up for city gas distribution.
“Healthy and virtually unregulated return ratios of 30 per cent, strong free cash flow yields of four per cent and dividend payout of 50 per cent and visible volume expansion opportunity make Mahanagar Gas our preferred bet in the gas space,” wrote Ritesh Gupta, analyst at Ambit Capital in a recent note on the company.
Suzlon Energy, a wind equipment and services player, has recovered some of its lost ground in recent quarters as reflected in its rising market share in high growth regions of Andhra Pradesh, Gujarat, amongst others.
The company’s foray in new markets (Telangana) as well as new segments (solar power) will serve as additional growth engines going forward. The company has also reduced its debt meaningfully by selling off Senvion (erstwhile RE Power), and due to sizeable equity infusion which though has led to suppressed share price.
The company continues to enjoy market leadership in the wind power segment and is estimated to return to profits this fiscal after posting net losses in the preceding three fiscal years.
“Fall in interest cost will drive a compounded annual growth in earnings of 52 per cent over FY17-19 for Suzlon and an ROCE of 33-37 per cent versus 29 per cent in FY16,” said Deepak Agrawala, analyst at Elara Capital. ROCE or return on capital employed measures how effectively a company has utilised its funds.
Illustration: Uttam Ghosh/Rediff.com