>INDIA GAS SECTOR

Down…But Not Out


 PLNG: Future perfect; near-term regulatory risks reduced — With the regulation of mktg margins virtually ruled out in the near term following the HC ruling on IGL as well as the oil min’s comments (source: ET) that marketers may be free to negotiate mktg margins for gas sold at mkt rates (à la LNG), PLNG arguably faces the least near-term regulatory headwinds among its peer set. Longer term, we remain sanguine about the prospects of LNG usage in India, which should benefit PLNG.


 GSPL: Offers best value — While GSPL’s upcoming tariff review continues to be viewed with caution, our view remains that downside, if any, is not very meaningful. This would make GSPL the most attractive investment opportunity in the space, trading at an adj. EV/CE of 1.1x vs. 1.5-1.9x for peers (P/E of 8x vs. 12x for GAIL).


 IGL: Oversold; price hike reduces near-term earnings risk — With the 8% CNG price hike just announced, IGL has belied market concerns on its ability to pass on higher input costs given regulatory uncertainty. We believe the stock is pricing in sustainable ROEs of a mere ~12% (post-tax ROCE of ~9%), which does not compensate it adequately for the risks inherent in the city gas business. Our new TP of Rs300 is based on sustainable ROEs of ~16% (~12% ROCE). We, however, acknowledge uncertainty on tariff evolution and maintain our High Risk rating.


 GAIL: Dearth of catalysts; buy another day — Earnings disappointments and lack of vol growth (with risks of degrowth) are yet to be fully factored in, in our view. While 1Q could sport a sharp (albeit unsustainable) recovery, we maintain Neutral.


 LNG demand hits a brief lull, but should recover in 2H — The bounce in Asian spot prices through 1H (Japanese demand, supply disruptions, production delays – highlighted in our May 8 ‘Upgrade to Buy’ on PLNG) and the sharp fall in liquid alternatives (crude weakness) has impacted spot LNG demand in India, which could cap 1Q vol gains for PLNG, GAIL, GSPL. However, with Japan restarting its nuclear plants, new production (Aus./Angola) coming shortly, and crude down sharply (LNG typically follows with a lag), spot prices to India have come off sharply in recent weeks, from >$15 to <$13 levels which should drive a pickup in 2H.


 Long-term prospects remain sound — Longer term, we remain sanguine about prospects for LNG in India, and are enthused not only by expansion plans of several players (capacity to grow ~4x in 5 yrs; PLNG to control ~50% of this), but also of the capacity that GAIL/GSPL are building to transport this gas to new areas.

RISH TRADER