FREE

Event update: Oil & Gas - 10th CGD bid winners announced; OMCs make a splash

EVENT –PNGRB announces winners of 10^th City Gas Distribution (CGD) bid round

Petroleum and Natural Gas Regulatory Board (PNGRB) has completed the 10th round of CGD bidding. The regulator announced winners of 50 Geographical Areas (GAs) along with the 2 pending wins from the 9^th round (held in Apr 2018). Post completion of the 10th round, 228 GAs covering 402 districts spread over 27 states and UTs are now authorised for CGD network. These areas would cover ~70% of India’s population and 53% of its geography.

Impact – OMCs to ramp up presence, GGL, Adani grow footprint, MGL loses out

• Among bidders, OMCs - IOCL and HPCL - successfully bid for 9 GAs each, while BPCL, through their subsidiary Bharat Gas Resources, won 2 GAs. Gujarat Gas (GGL), Indraprastha Gas (IGL) and GAIL Gas have been awarded 6, 3 and 4 GAs, respectively. However, Adani Gas managed to win only 2 GAs as against 13 in the 9th round. IOCL-Adani Gas JV won only 1 GA versus 9 in the previous round. Mahanagar Gas (MGL), on the other hand, lost out again, failing to win any GA post a disappointing 9^th round as well.  
• Overall, OMCs together won 20 out of 50 GAs, in line with their intention to grow presence in the CGD segment. To meet their objective, OMCs have already signed incremental long-term contracts to offtake LNG with Petronet LNG/GAIL. We believe OMCs are well placed to leverage their existing infrastructure network to support their CGD network development ambitions over the next 5-6 years, which would effectively diversify their business away from only petroleum downstream sector (please see Exhibit 2 below)
• The fast track completion of two rounds of bidding in last 12 months underpins government’s push to increase gas usage to ~15% of India’s primary energy from only 6-7% now. Post completion of the 9^th and 10^th round of bidding, we expect overall gas consumption to improve over the next 5 years from current 9MFY19 average natural gas consumption of ~149mmscmd (CGD share at ~25mmscmd). Assuming, incremental volumes of 0.25mmscmd from each GA (over 5 years), we can expect total incremental volumes of ~32.5mmscmd from the current allocated GAs in the 9^th and 10^th rounds.
• Meeting the incremental demand would however be a challenge within the contours of government’s current gas allocation policy. Assuming 60% of the above-mentioned volumes come from the CNG and domestic PNG segments, domestic gas production would have to improve materially to cater to the demand from these segments. Current domestic gas production of ~72mmscmd has been flat over last few years, but ONGC/RIL projections point to this output growing by 30-35 mmscmd over the next 5 years or so. We note however that a significant proportion of these incremental volumes are slated to be sold at a premium domestic price, which implies that the sourcing cost for CGDs would steadily rise to meet the incremental demand.
• Using Adani Gas and GGL as a benchmark, winners of the new GAs would require a capex of ~Rs1.5-2bn per GA over the first 5 years (the amount would vary depending on the surface area and volume potential). Since the capex would be funded in a 70:30 ratio, we could see material impact on the balance sheets of these companies. We estimate Rs195-200bn would be required over FY20-24E to develop all the new areas. 

VIEW – India’s gas story continues to gain momentum

PNGRB’s 9^th and 10^th round of bidding are significant positives in India’s quest to improve gas penetration in its overall energy mix. A large number of bids from public and private companies have provided an opportunity to expand the CGD network across the country. We have seen aggressive bidding from existing CGD companies except MGL; while Adani Gas, GAIL Gas, GGL and IGL have successfully won substantial GAs, MGL has been a laggard. Aggressive bids from OMCs have come as a surprise, with OMCs cumulatively winning 40 GAs in the 9^th and 10^th rounds of bidding. Private players like Torrent Power and consortium of AP&G also won bids for 12 and 11 GAs, respectively, suggesting rising interest from newer players in the segment. We await further developments on volume potential and financial details of the GAs, but remain positive on listed names such as Adani Gas, GGL and IGL. We maintain our Outperformer rating on GAIL, Gujarat Gas, IGL and MGL.