City Gas Sector Could See Consolidation Amid Margin Pressure: Citi's Saurabh Handa

The city gas distribution sector may undergo consolidation in the medium to long term, according to Saurabh Handa, director-India oil and gas and telecom at Citi. The financial pressures on companies could lead to more market consolidation as the stronger, cash-rich players endure while newer entrants struggle, he told NDTV Profit.

“In the medium to long term, there might be consolidation in the sector. The listed players are well entrenched. Even though their margins could take a hit, these are still cash-rich companies with strong balance sheets,” Handa said.  

The recent pressure on CGD companies stems from a significant reduction in domestic gas allocations by GAIL (India) Ltd., affecting major players such as Indraprastha Gas Ltd., Mahanagar Gas Ltd., and Adani Total Gas Ltd. These companies have seen their domestic gas allocations cut by 13-20%, which directly impacts their profitability, as they rely on this gas for their Compressed Natural Gas sales.  

Handa noted that while the immediate impact of these reductions on margins is clear, the ability of CGD companies to manage the price increases of CNG could mitigate some of the damage. “We have not seen any price hikes since the last cut, which happened in October. But it’s only a matter of time,” he said, highlighting that the key to managing these pressures will be passing on the higher costs to consumers.  

This marks the second reduction in domestic or APM gas allocations, following an initial cut in October by Oil and Natural Gas Corp. The combination of reduced domestic gas supply and higher reliance on more expensive imported Liquefied Natural Gas has put pressure on margins, particularly for city gas distributors who are unable to pass on these additional costs in the short term.  

Despite these challenges, Handa remains optimistic about the sector’s long-term prospects. He pointed to the government's ongoing support for natural gas usage, with the oil minister backing the push for a larger share of natural gas in the energy mix. “The government’s stance in pushing the usage of gas has not really changed. The oil minister is also supportive of pushing the use of natural gas, and that in some ways could lead to these companies benefiting from a longer-term perspective,” Handa said.  

If gas were to be included under the Goods and Services Tax, it would provide further relief to the CGD companies, he noted. “If gas comes under GST, these companies will again be better placed."

Despite the short-term pressures, stocks in the CGD sector have become more attractive for long-term investors, according to Handa. “Stocks have come to reasonable valuations. For long-term investors, it’s worth looking at,” he said, though he cautioned that investors may need to wait until the market conditions stabilise. 

“We need to wait for the dust to settle,” he said. 

Handa also weighed in on the performance of oil marketing companies, which have faced difficulties, particularly in the second quarter. He attributed some of the weakness to non-recurring factors but expressed optimism for a recovery in the upcoming quarters. “Q2 earnings were quite bad. Some of the factors are non-recurring, so you should see a pickup in Q3 and Q4,” he said.  

He highlighted HPCL as one of the companies to watch out for. “We are quite positive. We have a catalyst watch on HPCL, saying that there should be an earnings rebound.”  

On LPG, Handa acknowledged the recent weakness but indicated that government intervention might improve the sector’s outlook. “LPG earnings are looking optically weaker, but the government should introduce a subsidy soon because it’s a controlled product,” he said.  

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