We believe that a host of positive factors converge to make the Indian Natural Gas sector a highly attractive investment opportunity. In the medium and long term, these include: increase in domestic supply of natural gas; an infrastructure in place; and CGD gathering momentum. Over the longer-term horizon, the scenario is even more promising: the regulatory scenario is positive; while the importance of natural gas as a fuel of choice increases, the demand-supply gap seems an everincreasing phenomenon. Further, developing technologies in coal bed methane and promising potential of shale gas could well be a game changer. We are overweight on the sector and initiate with a BUY on GAIL, GSPL, GGAS, IGL and Petronet LNG.

SUPPLY INCREASING, DEMAND INCREASING MORE

By FY15, availability of gas is expected to increase to 255mmscmd from 156mmscmd in FY10, with KG-D6, ONGC and GSPC's new fields boosting production. Nearly 100+ mmscmd LNG capacities are expected to go on stream by FY15. Despite the increase in supply, demand is far likely to exceed supply.

INFRASTRUCTURE FALLING INTO PLACE

Transportation companies GAIL, GSPL and RGTL are aggressively investing on pipeline expansion. Networks are expected to increase by ~2.8x by FY15 to ~25,000km of trunk pipelines. GAIL plans to double capacity from 7,000km to 14,000km and GSPL intends to set up ~5,600kms of cross-country pipelines outside of Gujarat. With more clarity on the regulator PNGRB's role, authorization would be expedited. Thus, an across-the-country pipeline is no more a pipedream but a distant reality.

CITY GAS DISTRIBUTION: THE EXCITEMENT BEGINS

CGD in India is humming with activity. PNGRB has re-initiated the CGD bidding process and already conducted four rounds of bidding. With 17 networks licensed, bids are pending for 22 cities. Participation in CGD bidding has been strong with as many as 10 bids for some cities. GAIL has ambitious plans to roll out CGD infrastructure across 50 cities by FY14. GOI plans to bring 200 cities under CGD coverage by FY14 by putting 15-20 cities on bid every year.

VALUATION AND RECOMMENDATION

We are Overweight on the natural gas sector and we initiate coverage on gas transmission companies GAIL and GSPL, CGD companies GGAS and IGL and LNG bulk importer Petronet LNG with a 'BUY' rating. Our top picks in the sector are CGD players- IGL & GGAS and Petronet LNG.