IGL Stands Tall as GST Inclusion Could Revolutionize CGDs, Says Harshvardhan Dole of IIFL Securities

I think one key thing that I would like to see in the sector over the next 12 months is the inclusion of natural gas under the GST. This should benefit the entire gas utilities sector, including CGDs,” says Harshvardhan Dole, Vice President, IIFL Securities.

What is your own sense of NDA 3.0 this time around? There are a lot of expectations about whether natural gas will come under the GST, what happens to those heavy dividends and the capex lined up. What is your own estimate for the next four to five years for this entire sector?


Firstly, I am quite pleased to see the continuity in leadership. The same minister occupying the office ensures policy continuity. The sector has done remarkably well post-COVID, especially in uncertain times. The government has supported the sector by not cutting prices when companies were recouping their earlier losses. I am quite glad to see that. The minister’s statement that he would prefer to be conservative than aggressive is even more assuring.

If oil prices stay between $75 and $85 per barrel, this is a sweet spot for the entire oil and gas sector. We’ve published a note saying that worries are gone, and the party is set to go on. If this benign environment continues, there is a possibility of earnings upgrades across the sector, including upstream companies, downstream companies, and some gas entities. We are quite positive on the whole sector.

I want to specifically talk about oil marketing companies because BPCL is going for a new refinery at a capex of ₹50,000 crore. It appears that these companies are making big capex moves. What are your thoughts on their capex plans? Is Engineers India a good play since they get most of the consulting work from these refiners?

Last time we interacted with BPCL top management, they indicated plans to scale up refinery capacity to 45 million tonnes. After the Bina expansion, the gap is about 7 to 8 million tonnes. The article in the media seems slightly off, and I am not sure if they are planning a new greenfield refinery or if they may just debottleneck the existing one. But yes, 45 million tonnes is their target. Engineers India appears well-placed, but I don’t cover them, so I won’t provide an earnings update.

What is your view on the city gas distribution space and the entire gas sector, especially with the expectation of natural gas coming under GST?

I think one key thing I would like to see in the next 12 months is the inclusion of natural gas under the GST, which should benefit the entire gas utilities sector, including CGDs. Of the three CGDs we track, IGL is our preferred pick because it has mastered balancing volume and price growth. Mahanagar Gas is trying to revive volumes but is sitting on peak margins, so even if volumes grow, margin compression will lead to muted earnings growth. Therefore, we do not like the risk-reward in Mahanagar Gas. Gujarat Gas is also at peak margins and needs more than just GST inclusion for us to turn favorable. So, IGL is the only preferred play in the CGD pack.

When do you see volumes, both gas and oil, really take off in a big way? What are your thoughts on ONGC’s valuations?

At current valuations, ONGC is not pricing in any possible uptick in volumes or realizations in oil or gas prices. At 5-6 times PE and a dividend yield of 6-7%, the market is pricing in flat earnings for a long time. So, any uptick is not reflected in the price, and we like the risk-reward. It is a good trade now. Large E&P projects are complex, and a delay of a couple of quarters should not be taken negatively. Some private entities that invested billions have had issues with gas outputs, so I will not negate the possibility of an uptick in gas production for ONGC. Yes, there has been a delay of a couple of quarters, but these are large technical projects, and a couple of quarter delays should not derail the overall production revival strategy.

What is the view on Reliance Industries? Would you still see some upside given its complex business with multiple parts?

I think Reliance offers good downside protection at the current market price because I do not see the stock falling significantly. The O2C business is well-integrated, so there is unlikely to be any earnings shock. Similarly, the two B2C businesses are performing well and should deliver QoQ earnings growth for several quarters. If the anticipated tariff increase in Jio happens, Reliance is well poised to deliver 15% compounding from hereon. All eyes are on the AGM because big announcements that improve visibility for the next 12 months are typically made there. Some triggers might emerge thereafter.

What are your thoughts on the new power minister, Manohar Lal Khattar? How do you rate the work done so far under the previous minister, Mr. RK Singh? What areas need incremental work in the power sector?

Power is a concurrent subject. It is good to see a minister credited with turning around two distribution entities in Haryana. I am sure he will take steps to revive distribution companies. The key challenge is coordinating with states to install smart meters and improve cash flows. The industry is ready to increase supply. The risk-reward is more favorable for generation entities.

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