We attended the Petroleum and Natural Gas Regulatory Board’s (PNGRB) kick-off road show for the ninth round of city gas auctions.

Hits: 1) Scope doubled: 86 geographic areas (GAs) have been shortlisted, 2x existing authorised GAs (91). Marketing exclusivity has been raised from five to eight years, which has been the main earnings driver. 2) Fair bidding terms: Primary focus will be on creating infrastructure (PNG: 50% weight, CNG: 20%) & not tariffs.

Misses: 1) Capex to be front-loaded: Domestic PNG requires high upfront capex & long gestation, implying lower profitability initially; and 2) Modest potential GAs: While some of the GAs are big (Chennai, Jaipur, etc), the list also includes a long tail. We believe, absence of gas pipeline infrastructure will limit interest in a few of the Gas.

We believe, with rich expertise in a highly involved business, incumbents — Indraprastha Gas (IGL), Mahanagar Gas (MGL) and Gujarat Gas (GGL) —will pursue high-potential GAs. Moreover, CNG usage will increase across existing networks on enhanced inter-city infrastructure. However, new players like Reliance and Torrent are also likely to evince interest. Overall, reforms under the revamped PNGRB will prolong high-growth phase for the industry. We have ‘buy’ on all the three companies with our pecking order being: 1) GGL, IGL and MGL.

Salient features: 1) CGD purview doubled: To cover customers consuming 0.1mmscmd; and 2) Revised bidding terms: Prior rounds were based on network tariff & bank guarantees. However, the new policy primarily focuses on infrastructure (80% weight) and not on tariffs (20% weight). Balance sheet restrictions have also been eased.

GGL had aggressively bid in the earlier round of CGD auctions, strengthening its quasi monopoly in Gujarat. We believe, IGL will actively participate for regions offered in Haryana/Uttar Pradesh to leverage existing infrastructure and connectivity in adjoining GAs, which will prolong high growth (>10%). MGL is evaluating 20 GAs in adjoining areas of Nashik and Aurangabad to strengthen its regional footprint.

GGL, with a relatively stretched balance sheet, could be more selective.

The government had earlier set aggressive targets for CGD—10mn households across India to have access to PNG, almost quadrupling in four years. We, therefore, maintain that CGD penetration in India will gradually increase, with incumbents IGL, MGL and GGL better poised to leverage their expertise and strong balance sheets. With focus firmly on city gas, we await clarity on pending pipeline tariff orders of GAIL and GSPL.