India is the world’s third largest energy consumption country after the U.S. and China and according to BP Energy Outlook, India’s share in global energy consumption is expected to increase from 6% in 2018 to 12% in 2050. Underlying this trend will be a convergence in the contribution of natural gas in the energy mix for China and India, such that by 2050 gas could account for 15- 25% of energy across every major global economy. India is primarily reliant on imports for its oil and gas requirements to the extent of 80% and 50% respectively Indias natural gas consumption is targeted to rise more than three-folds over the next decade, from about 170 million standard cubic metres per day (mmscmd) to 600 mmscmd, based on economic and environmental considerations.
This target is also aligned with the governments vision for gas consumption by 2030. The country has committed investments of $ 60 billion to expand gas infrastructure that includes LNG import terminals, laying of pipelines and expanding city gas distribution networks across the country. Gas fuels production in heavy industries such as fertilizers, power, refineries and petrochemicals apart from its growing consumption for domestic purposes and automobiles. Industrial production currently reliant on coal and naphtha is transitioning to gas-fuelled plants and domestic gas production is also expected to rise commensurately.
Fertilizers and city gas distribution (CGD) are seen to be the primary drivers of future consumption trends in the country Following the successful 9th and 10th rounds of city gas distribution (CGD) auctions conducted by the Petroleum and Natural Gas Regulatory Board (PNGRB) in 2018, there is a committed and timebound expansion of infrastructure to be executed over the next five years. Over the last five years, CNG infrastructure has already been expanding with the number of operating CNG stations in the country increasing to 3,000 as on 31st March 2021.
While there has been a steady increase in the number of CNG-fuelled vehicles operating on Indian roads on an overall basis, availability of CNG on a more widespread basis is currently confined only to a few states – namely, Maharashtra, Gujarat, Delhi NCR and now Uttar Pradesh. Contribution from gas usage is likely to expand as pipeline connectivity in the 136 new GAs, allocated under 9th and 10th CGD bidding, has now already completed nearly three years. By the year 2030, Indias network of CNG stations is set to exceed 11,000, a growth of five times in a tenyear period with extensive nationwide coverage. Given the favourable economic proposition for CNG vehicles, compared to those powered by petrol or diesel, demand for this clean fuel option should expand considerably as auto manufacturers increase production and expand the number of models fitted with factory-fitted CNG kits.
The market share of CNG-fuelled cars sold in the Indian market increased from 4% in 2019-20 to 6% in 2020-21. Going forward, prices of CNG-powered vehicles may further rationalize with increasing scale of production and demand could increase with the availability of a larger range of models from many leading auto makers.
In such a scenario which are the companies which are likely to derive maximum benefit & grow significantly considering the fact that commodity prices like Aluminium and Steel have now started correcting sharply? ne such company which is a dominant leader in the entire CNG & Industrial Cylinder market value chain is Everest Kanto Limited (EKC) which is in to manufacturing of high pressure seamless cylinders for industrial gases, CNG applications, large diameter high pressure seamless vessels, large seamless cylinders, jumbo cylinders & jumbo skids for the storage & bulk transportation of CNG, Nitrogen, Helium, Argon, etc which find applications in domestic and international markets like autos, aerospace, chemical processing, construction, food production, nuclear, power etc EKC is the largest player among the domestic space with a market share of over 50% and is amongst the top 10 players in the global space in the manufacturing of high-pressure gas cylinders, which is used in the storage of Compressed Natural Gas (CNG) and industrial gases EKC has a extensive range of products which cover various segments like CNG, Industrial Cylinders, Medical Cylinders, Hydrogen Cylinders, Fire Extinguisher Body Cylinders, Jumbo Cylinders, Breathing Air Cylinders and Type 4 Composite Cylinders Further, EKCL has diversified customer mix consisting of OEM (Original Equipment Manufacturers) such as Bajaj Auto Limited, Tata Motors Limited, Ashok Leyland, VE Commercial Vehicles Limited (Eicher Motors), CEV Engineering Pvt Ltd (Hyundai), etc.
The customers also include some of the large industrial gas manufacturers like PraxAir, fire fighting product companies such as Tyco, Siemens, Minimax etc and city gas distribution companies like Adani Gas, Mahanagar Gas, Indraprashta Gas etc. Further, the company has manufacturing facilities in Dubai and USA apart from India. EKCL exports to countries in Middle East, Africa, Europe, South America and CIS countries We expect industrial cylinders to show strong growth over the next few years, backed by strong growth in the Indian manufacturing sector, which is expected to show double-digit growth rates. Government initiatives in projecting India as a medical tourism hub and higher investments in health care would also drive demand for industrial cylinders used to store oxygen Compressed natural gas (CNG) is believed to be the cleanest burning fossil fuel, compared to petrol, diesel and even liquefied petroleum gas.
We expect demand for CNG cylinders to show robust growth not only due to environmental issues and cost-effectiveness but also to the increase in natural gas availability throughout the world. We expect many cities in India to be covered by CNG refuelling stations due to increase in the availability of gas, which in turn would lead to increase in demand for CNG cylinders Also the CNG/Industrial Gas Cylinder Industry has very high entry barriers and requires several certifications before new players can start operations.
Hence effectively competition is limited giving EKC reasonable pricing power In our opinion EKC is the best proxy to play the CNG theme which is likely to show strong growth over the next 3-5 years ahead as EKC enjoys scale & a well established infrastructure to benefit from this change All this has got reflected in FY22 numbers with revenues at Rs 1699 crs & a PAT of Rs 265 crs vs Rs 90 crs last year with a net EPS of Rs 24 as compared to Rs 8 in FY21 From a valuation perspective the EKC stock has also corrected by almost 37% from its peak in April 2022 & currently trades at Rs 173 levels at a PE multiple of 6xFY23E & 4xFY24E.
(The author is the Head-Research at Profitmart Securities and a seasoned financial planner and equity researcher.)