What to buy in this market? CLSA sees green shoots in this sector

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Global brokerage firm CLSA prefers gas consumption stocks over liquefied natural gas (LNG) players as it expects rising gas output may keep the domestic LNG demand growth muted.

“Weak LNG demand and rising competition in the re-gas industry will make the macro adverse for LNG regasifiers such as Petronet,” CLSA said it adding it is positive on gas consumption plays such as Gujarat State Petronet (GSPL), Indraprastha Gas (IGL), Mahanagar Gas (MGL) and Gujarat Gas.

Shares of Gujarat Gas have rallied 88% to Rs 543.45 during the past one year, while the benchmark BSE Sensex has advanced 32%. GSPL, ONGC, IGL and Mahanagar Gas have also jumped between 18%-31%. On the other hand, Petronet LNG has gained just 4% since March 4 last year.

CLSA said that there are early signs of reversal in domestic gas production after years of decline.

Domestic gas production has risen by 6% or 4.6mmscmd in the past two months to 82.3mmscmd (Jan 2021) as gas output from eastern offshore fields rose 3.4x, or 4.4mmscmd, mainly led by a ramp-up in production at the RIL-BP fields.

“Recently concluded auctions for around 12.5 mmscd of gas by RIL-BP should raise investor belief in the 35% rise in domestic gas production over the next two years,” CLSA said.

The overseas firm further added that Reliance’s and ONGC’s guidance suggests India’s domestic gas production will rise over 40% in the next two-to-three years. The continuation of these initial signs of rising output will help turn investors into believers of India’s gas production rebound story.

“The start of Phase 2/3 of the RIL-BP fields along with the likely start of output by ONGC in the same basin (KG-98/2 by end FY22) will only help bolster this belief,” CLSA added.