- Wealth PMS (50L+)
Part 3 of our series explaining Adani Group Companies and their businesses. This one covers the business of Adani Total Gas Ltd.
Read all posts in the series here: Adani Group Explainer
The city gas distribution arm of Adani Group is slated to become the largest city gas distributor in India in terms of number of areas under operations. Currently, the company is selling a majority of its gas in just four geographical areas, but soon this will increase by 15. All thanks to the new areas won under the 9th and 10th round of city gas auction conducted in 2018 and 2019.
Along with this, the company also has a joint venture with Indian Oil Corporation Ltd. which currently supplies gas to seven geographical areas, while in the 9th and 10th round of city gas auction it has won bids to supply gas to additional 12 areas.
City gas distribution is a near-monopoly business with no control over selling price. Adani Gas has the highest growth potential amongst the listed peers who are largely dependent on older geographical areas. Further, dependence on new areas reduces the risk on account of open access policy/loss of marketing exclusivity. Adani Gas’ higher CNG station throughput and better asset utilisation lead to it having one of the lowest operational expenditure in the industry. Further, its gas sourcing strategy and higher dependence on CNG business have been EBITDA accretive.
As per the company estimates, the demand potential for gas would increase to 97 mmscmd (million metric standard cubic meter per day) from the current 2 mmscmd, over the next 8 years. This would include all the 38 geographical areas (19 own + 19 in JV) won by the company. To build and develop infrastructure in these areas, the company is estimating to incur a capital expenditure of close to ₹ 13,000 over the next five years.
The CGD sector has gained momentum in the past few years post the government’s decision to allocate domestic gas to CNG and domestic PNG customers. This had given access to cheaper gas for CNG and domestic business segments, which currently comprise nearly three-fifths of Adani Gas’ sales volumes. Cheaper domestic gas has improved the cost advantage of CNG over petrol and diesel for customers and will enable increased conversion to CNG vehicles. For industrial and commercial segments, the company continues to source imported LNG providing a level field for all CGD players.
In the CGD space, among the listed players, Adani Gas is currently the most valued, but in terms of financials, it is still far behind its peers.
No doubt, Adani Total Gas with the highest potential volume growth and robust earnings visibility over peers, is worthy of higher multiples. That said, as of now, Adani Total Gas share prices look completely detached from fundamentals.
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