Derating cycle may end for gas distributors | Economic Times

ET Intelligence Group: Stocks of city gas distribution (CGD) companies could be accorded a premium price-earnings multiple compared to their average since the downstream gas regulator’s fresh rules to allow new players would not translate into heightened competition as initially feared by investors. CGD companies such as Indraprastha Gas and Mahanagar Gas saw their stocks rise 10-14 per cent last Friday after the Petroleum and Natural Regulatory Board (PNGRB) announced its policy on open access — a rule for the usage of gas infrastructure facility of incumbent players by a new entrant — which removed the overhang on stocks for the past one-and-a-half years.Under the new policy, third party open access has been allowed for new CNG stations after the date of notification while the existing facilities operated by dealers and franchisees of authorised CGD companies (including oil marketing companies) have been kept out of its ambit. It even bars OMCs from putting up their own dispenser units in their existing network which has already been let out to a CGD operator. The new policy suggests that the regulator intends to increase penetration of CNG stations by creating additional infrastructure rather than by fostering higher competition among incumbent players.After the release of the draft open-access code, investors expect CGD companies to keep one-fifth of their existing capacity for third-party shippers and that the current arrangement of OMCs’ outlets retailing CNG could be at risk. This has elevated the risk to the sustainability of volumes and operating profit per standard cubic metre, which is the cornerstone of any CGD player’s earnings growth.The new rules suggest that CGD companies would not be able to use the outlets of OMCs, which they have extensively used to retail CNG, on their own after the new policy comes under force. As per the new rules, 60-70 per cent of the total CNG volume of the CGD companies should be sold through the retail stations owned by OMCs. Therefore, if the existing CNG station remains out of the purview of open access, the bargaining power of CGD companies for negotiating trade discounts will increase. It must be noted that before the new policy announcement, the OMCs sought a steep hike of 90-100 per cent for the trade discount. The biggest beneficiaries of the new rules will be IGL and MGL, for whom CNG constitutes 73 per cent of total volumes.With the existing relationship of the oil marketing companies’ outlets for CNG retailing likely to continue for last-mile connectivity, the fear of margin erosion after open access remains unfounded. 79480712As a result, the recent margins of IGL and MGL are likely to sustain which were overlooked by investors despite a record level because of fear of margins erosion after the open access. The removal of margins erosion overhang and probability of volume slippage in the current network from new competition could result in an earnings upgrade of 8-10 per cent for the current and next financial year.The end of regulatory risk for the CGD companies could end the cycle of derating for the past two years. IGL and MGL are trading at 26 and 11 times of their one-year forward earnings respectively.