OREANDA-NEWS. March 24, 2011. Strong excitement in the Indian Natural Gas sector is palpable now. A number of positive enablers promise to change the dynamics of the sector. And even as India prepares to address the challenges of change and growth, natural gas, the clean alternative fuel, has a crucial role to play securing the country's growing power needs:

Natural gas emerging the fuel of choice: Through Hydrocarbon Vision 2025, Government of India (GoI) targets increasing the share of natural gas in its energy mix to 20% in 2025 from 10% now (vs. 24% global average). This is also in line with GoI's aim to cut CO2 emission by 25% by 2020.

Natural gas gaining importance in a changing consumption mix: India's targeted ~8% GDP growth would entail near-doubling of energy consumption by 2020. The consumption mix, which is skewed toward coal and oil (84% share) is set to change in favor of natural gas.

Demand-supply gap widening: We expect demand for natural gas to grow at 19% CAGR from FY10 (157mmscmd) to FY15 (381mmscmd) and maintain its trend of exceeding supply, which is growing at 157mmscmd to 255mmscmd during the same period. We expect supply to be driven by commissioning of power, capacity addition in fertiliser sector, and increasing traction in CGD. The launch of NELP boosted domestic production and imported LNG would go a long way in supplementing the country's growing needs.

No more regulatory ruffles: A regulatory authority in place and GoI's plans of rolling out CGD to 200 cities create a propitious scenario for ramping up infrastructure and doubling pipeline capacity by 2015. To compete globally, GoI is trying to bring domestic gas prices in line with international prices.

Shale gas is changing the energy paradigm: Technological advancements resulted in the production of shale gas in the US. This revolutionary change, promises to change the entire market dynamics of natural gas, considering the vast global reserves of shale gas.

We are positive on the Indian natural gas sector and initiate coverage with a 'BUY' rating. With upcoming new cross-country pipelines, GAIL and GSPL should grow strongly. Ample demand and better cost economics should result in high growth and strong cash flow for CGD players like IGL and GGAS. Capacity expansion at the right time should bode well for Petronet LNG. Our top picks in the sector are CGD players- IGL & GGAS and Petronet LNG.