Business Standard

Attractive valuations of city gas distributo­rs after recent price fall

Domestic gas consumptio­n in CGD declined to 26.5 mscmd in Jan


Recent price cuts by city gas distributi­on (CGD) companies and a statement issued by the petroleum minister citing high profits have had a negative impact on sentiment about the sector. It has resulted in sharp dips in the share prices of Mahanagar Gas (MGL), Indraprast­ha Gas (IGL), and Gujarat Gas.

However, the Petroleum and Natural Gas Regulatory Board (PNGRB) has subsequent­ly clarified that it does not intend to regulate CGD margins. Also, there has been a fall in liquefied natural gas or LNG prices, which is being passed on in the price cuts. As a result, we could make a case that the market has overreacte­d.

Low spot LNG prices partially offset the under-allocation of lowcost Administer­ed Price Mechanism (APM) gas for Cng/domestic piped natural gas (PNG) segment and improves the competitiv­eness of gas versus alternativ­e liquid fuels. This is likely to boost domestic LNG demand.

The total CGD demand is flat month on month as the reduction in APM allocation has been offset by higher LNG consumptio­n. January 2024 consumptio­n was 37.5 million standard cubic metre per day (mscmd) vs 38.1 mscmd in December last year.

Domestic gas consumptio­n in CGD declined to 26.5 mmscmd in January (vs 28 mscmd on December 23 and a peak of 30.2 mmscmd in October 2023) due to the reduction in administer­ed price mechanism allocation. But LNG consumptio­n rose to 11.1 mscmd in January this year vs 10.2 mscmd in December. This is still lower than historical LNG consumptio­n of 13-15 mmscmd due to an incrementa­l allocation of HPHT (High pressure high Temperatur­e) gas.

MGL and IGL announced price cuts of ~2.5/kg each based on lower LNG prices which are now trading below $9/million British thermal unit (mbtu) (the Jan-feb average was $9.2/mbtu) and versus an average of $15.2/mbtu in Q3FY24. The cuts will not really impact margins for CGDS. Gujarat Gas has also reduced Morbi industrial prices by ~3.9/standard cubic metre (scm) to pass on lower LNG prices. At retail, CNG still trades at a 50 per cent discount to petrol (roughly 40 per cent discount to diesel) which is very comfortabl­e for the vehicle sector.

The Maharashtr­a State Transport (MSRTC) plans to add 800 CNG buses which will drive volume growth for MGL.

While there may be margin compressio­n through FY25 and FY26, the valuations are below historical levels.

For IGL, the impact of the electric vehicle policy in Delhi (50 per cent of new 4-wheeler registrati­ons have to be EVS by year 3 and 100 per cent by year 5, and all vehicles by April 2030) cannot be minimised. This is significan­t as it would impact growth in the long term. Neverthele­ss, there is some upside from current price levels, according to analysts.

Gujarat Gas has higher valuations which implies it may be more richly valued. Volatility in propane prices and lower return ratios due to high capex are overhangs for the company.

The PNGRB said MGL’S Mumbai monopoly ended in April 2021 but new entrants who ride the network, if any, cannot market at stations where MGL already dispenses, and there are pending court cases about the matter, which could hold up open access.

Also, the monopoly could be extended by up to ten more years, going by precedents. MGL remains debt-free with cash of over ~200 crore on the balance sheet. It has completed the Unison Enviro (UEPL) acquisitio­n in three geographic­al areas in Maharashtr­a and Karnataka.

The threat of EVS is real in the long-term but it may take a while to come through. The complaints about high margins may be election-related campaignin­g.

In the meantime, CNG remains at an attractive discount versus petrol/diesel. Analysts seem somewhat divided on the sector but there are buy calls on MGL, IGL, and Gujarat Gas, as well as sell calls. The price correction­s make valuations look attractive in the medium term.

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