Coronavirus to accelerate India’s energy transition from towards gas; these stocks stand to benefit

Currently, despite having large coal reserves India still imports 25% of its energy needs and for oil, the country imports 80% its demand.

Consumption habits have been changing in the wake of the coronavirus pandemic as discretionary spending is expected to come significantly down from the pre-coronavirus levels. This change in consumption is also set to accelerate India’s energy transition towards gas, from coal and oil, said global brokerage and research firm Morgan Stanley. The shift towards gas will be alike for both individuals as well as industry, pushing India’s oil beta down but driving up investment and employment. Morgan Stanley said that such a move will also prove to be beneficial for a large number of stocks, ranging from pipeline owners to industrial consumers.

Over 75% of India’s energy demand is currently met by coal and oil, with the former being the dominant one of the two energy sources. “The (coronavirus) outbreak has materially accelerated the shift from coal and oil to gas and renewables, and the economic implications will be multifaceted,” Morgan Stanley said in a report. The projected direct investment that comes with the shift into the gas energy market is pegged to be around $140 billion along with a 300 basis point jump in employment growth. Moving from coal and gas, the majority of which is imported by India, will also help the country cut its current account deficit by an average of $4-4.7 billion annually. According to the research done by Morgan Stanley, the shift will also lower energy costs for consumers and industrial companies alike, by up to 25% on average.

Across the globe oversupply has accelerated, deflating prices for Asian gas consumers. “We believe India is the biggest beneficiary as consumer prices have fallen 25% and remain structurally low at a time when gas infrastructure is doubling and the advent of renewables is making gas even more prominent in the fuel mix,” Morgan Stanley said. Acting as a catalyst to support this move are the changing regulatory policies and stricter standards on pollution and the opening up of India’s first Gas Exchange. 

Beneficiaries from this change include players from various sectors. Gas pipeline owners like Indraprastha Gas Limited and Gujarat gas, along with auto giant Maruti which is pushing for CNG in vehicles are some of the obvious names. To add to the list, enablers like fuel retailers, infrastructure builders like L&T, and end industrial consumers Ambuja and Tata Steel are the stocks that Morgan Stanley highlighted. 

In the oil and gas industry, the report says, by 2025 dependence on domestic gas will increase, proving to be beneficial for GAIL, Petronet LNG along with the already mentioned players. With the usage of gas increasing, the automobile sector where only 4% vehicle run on CNG will increase to 7% proving to be beneficial for players like Maruti and Bajaj Auto. Reducing coal-fueled power stations and increasing gas utilization might be in favour of Tata Power. Increasing the number of CNG stations and improving the pipeline length will also help GAIL but may also help Larsen and Turbo. 

Currently, despite having large coal reserves India still imports 25% of its energy needs and for oil, the country imports 80% of its demand. “We estimate that India’s current account deficit will be in the range of 1-1.5% of GDP over the next five years. Taking into account the annual saving of approximately $4 billion (on average, for next five years) as a result of the shift towards gas, implies a net saving of about ~7.5% on the current account deficit,” Morgan Stanley said.