In early November 2018, Adani Gas, the demerged gas distribution arm of the Adani Group was listed on the bourses at ₹72 per share. Since then, the stock has rallied about 33 per cent and now trades at about ₹96 a piece. Compared with its peers in the city gas distribution (CGD) business, Adani Gas listed at a valuation premium that has widened since then. At the current levels, the Adani Gas stock trades at about 45 times its annualised FY-19 earnings, far higher than Indraprastha Gas (26 times), Mahanagar Gas (17 times) and Gujarat Gas (20 times).

While Adani Gas has strong business prospects, as reflected in its recently-declared results for the nine months ended December 2018, the positives seem to be more than factored in the stock price. Investors can consider booking profits, given the high valuation premium that could correct amidst the ongoing market volatility and election-related uncertainties.

Adani Gas has been entrenching its significant position in the CGD business in the country, thanks to its aggressive bidding and many wins in the CGD auctions. Even so, the stock’s valuation premium over peers (formidable players themselves) seems high. There have also been concerns in some quarters about the financial viability of some of the aggressive bids by companies in the recent auctions. Corrections in the stock price could present attractive entry points for long-term investors seeking exposure to a major play on the high-potential CGD business in the country.

Big footprint

Adani Gas has two business units — one, wholly-owned (100 per cent stake) unit, and the other, a joint venture with PSU major Indian Oil Company (50 per cent stake). Together, these units have a big and expanding footprint in the CGD business in the country. Its wholly-owned business unit has four existing CGD licenses and has won 13 licenses in the ninth CGD bidding round. The joint venture has nine existing licenses and has won nine in the ninth CGD bidding round. In all, that adds up to licenses in 35 geographical areas — 13 existing and 22 new, giving the company a pan-India presence.

Besides this, in the recent 10th bidding round, the company’s wholly-owned business unit has bid for 19 geographical areas, while the joint venture has bid for seven; the results are expected by this month-end. To increase the share of relatively cleaner natural gas in the energy mix, the Centre has plans of expanding the CGD network across the country, and Adani Gas plans to participate in future bidding rounds too. Cost benefits compared with alternative fuels such as petrol, diesel and liquefied petroleum gas (LPG) should keep compressed natural gas (CNG) and piped natural gas (PNG) volumes ticking for CGD companies.

In its wholly-owned unit, Adani Gas has seen healthy growth in operations over the past few years, with sales volumes increasing from 1.1 mmscmd in 2015 to 1.4 mmscmd in 2018. In the nine months ended December 2018, volumes grew 14 per cent Y-o-Y. Volume growth should continue at a good pace with increased penetration in existing geographical areas and operations commencing in areas won under recent bids.

The company derives nearly 60 per cent of its volumes from the CNG and domestic PNG segments that get cheap domestic gas supply on priority basis as per government policy; the remaining volumes come from PNG to industries and commercial establishments. The company has 77 CNG retail outlets to supply the fuel to vehicles and caters to about 3.6 lakh households, 1,250 industrial and 2,500 commercial customers. At present, more than 90 per cent of the volumes in the wholly-owned business unit comes from the Ahmedabad and Faridabad geographical areas.

Healthy financial performance

The company’s financials continued growing at a brisk pace in the nine months ended December 2018, with consolidated revenue from operations in this period rising 34 per cent Y-o-Y to ₹1,329 crore and net profit increasing 25 per cent Y-o-Y to ₹153 crore. Over the past few years, the operating margin has been quite healthy at around 25 per cent and so has the return on equity at over 20 per cent. The company plans to invest over ₹8,000 crore in the CGD business over the next five years; its strong balance sheet positions it well to do so.