Gas distributors’ stocks feel the heat as global fuel prices soar

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Credit Suisse has downgraded gas distributors Indraprastha Gas Ltd (IGL), Gujarat Gas Ltd (GGAS), and Mahanagar Gas Ltd (MGL) after their stocks corrected 20-30 percent from their peak, with high domestic gas prices and blending impacting the margins of these companies.

On the back of margin pressure led by the potentially increasing blending requirement, higher domestic gas price for the next 18 months and medium-term risk on volume growth from EV conversion, the brokerage downgraded IGL to underperform (from outperform) with a new target price of Rs 290 (from Rs 640), GGL to underperform (from neutral) with a target price of Rs 380 (from Rs 635). It also downgraded MGL to neutral (from outperform) with a new target price of Rs 785 (from Rs 1,500).

Credit Suisse said city gas players will no longer be able to take accretive price increases like in the past and steady-state margins will most likely settle down below levels seen in 2019-20 fiscal. It also maintains a negative outlook for the sector.

CNG (compressed natural gas) and residential PNG (piped natural gas) segments account for 85-90 percent of earnings before deductions for IGL, 85 percent for MGL, and 45 percent for Gujarat Gas.

Also Read: CNG to get costlier in Mumbai from April 30; check new prices here

Also, if crude oil stays above $100/bbl, it will allow city gas players to expand margins in the steady-state. Also, if the government caps the domestic gas prices or changes the gas pricing formula, a sharp reduction in LNG spot gas prices, and higher allocation to the city gas sector in the near term, will affect the city gas players, the note said.

Another negative for city gas companies is gas blending. The brokerage expects that the blending requirement for city gas companies could increase to 50 percent by the 2026 fiscal. Already, CNG station additions to the system last fiscal were twice that of the year before, and are set to further double from the 2025 fiscal onwards. The 2025-26 fiscal’s residential PNG connections will be four times the connections set up by last fiscal.

The government can make some short-term quick fixes by diverting three mmscmd (million standard cubic metres per day) of gas from fertiliser and power plants to the city gas distribution sector, but that does not solve the longer-term issue of increasing demand and lack of additional supply.

City gas CNG and residential PNG demands are expected to double from 22-23 mmscmd in the 2022 fiscal to close to 47 mmscmd in the 2026 financial year. Currently, the industry is working at a 12-15 percent APM gas shortfall (3 mmscmd). This blending is set to cross 40 percent by FY25 and 50 percent by FY26 given the current scenario.

Also Read: India crude oil production dipped 2.6% in FY22; natural gas output up

On the supply side, ONGC’s new fields can add net 8 mmscmd of gas but the net increase in domestic gas supply may still be low due to a decline in production from existing fields.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow