Whalesbook
Adani Total Gas Reports Growth Despite Higher Costs
Adani Total Gas (ATGL) announced a net profit of ₹168 crore for the March quarter, an 8.9% rise from the previous year. This growth was supported by a strong 13% increase in operational volumes for its compressed natural gas (CNG) and piped natural gas (PNG) networks. Revenue grew 16.6% to ₹1,695 crore, reflecting network expansion and rising demand. The company's stock closed 1.46% higher at ₹636 on Monday.
Margin Squeeze Amid Higher Gas Expenses
ATGL's profitability faced pressure as operating margins narrowed to 17.76% from 18.32% year-on-year, despite revenue growth driven by volume. The primary reason was an 18% increase in natural gas expenses. The company reported a shift from cheaper domestic gas allocations to more costly market-linked Liquefied Natural Gas (LNG), with its share of APM gas for CNG dropping to about 36% from 41%. CEO Suresh P. Manglani pointed to challenging costs from geopolitical events in West Asia and high LNG prices. He stressed a diversified sourcing strategy for supply security. Management chose a careful pricing strategy, avoiding passing on the full cost increase to customers to maintain volume momentum.
Infrastructure Development Continues
Adani Total Gas also continued its infrastructure expansion. The company now operates 705 CNG stations, has approximately 11 lakh PNG home connections, and offers 5,100 EV charging points. New city gas stations and LNG facilities further broadened its reach.
High Valuation Compared to Peers
Adani Total Gas currently trades at a Price-to-Earnings (P/E) ratio of about 107.37, considerably higher than its domestic competitors. Indraprastha Gas (IGL) has a P/E of roughly 13.90, and Mahanagar Gas (MGL) trades at approximately 11.53. This wide gap indicates that while ATGL shows volume growth, its high P/E might depend on future growth projections that could be tested by ongoing input cost swings and the challenge of raising prices without hurting demand.
Sector Growth Outlook and Global Risks
The Indian city gas distribution (CGD) sector is expected to grow strongly, with a projected Compound Annual Growth Rate (CAGR) of 12.67% to 12.84% until 2032. This is driven by government efforts to boost natural gas use in the energy mix to 15% by 2030 and increasing urbanization. ATGL's stock has risen 3.1% in the past year, slightly outpacing the Nifty 50's approximately 1% gain. However, reliance on imported LNG exposes the company to geopolitical risks and global price swings, which have recently increased input costs. Energy and utility stocks have shown strength, often seen as safe havens during global uncertainty.
Key Challenges and Analyst Concerns
A key concern is ATGL's reliance on expensive spot LNG due to lower domestic gas allocations, which makes its margins highly volatile. This differs from peers who may have more stable supply contracts. ATGL's P/E ratio of around 107 is very high compared to industry averages, suggesting strong market expectations that could be threatened if margins worsen or growth slows. The company also has limited analyst coverage, with only two analysts tracking it and no forward earnings estimates available, complicating future performance predictions. One broker has already downgraded the stock. While volumes are growing, the company's ability to manage high gas costs without harming growth remains a significant challenge.
Analyst Views and Long-Term Prospects
Analysts currently have a mixed outlook, with a consensus 'Hold' recommendation for Adani Total Gas. The average target price stands at ₹1,085.00, suggesting considerable potential upside from current levels, though this outlook is complicated by limited analyst coverage and prediction uncertainty. The long-term prospects for India's CGD sector are positive, supported by government policy and growing demand for cleaner energy, providing a strong backdrop for ATGL's expansion.