MGL, IGL, Adani Gas shares surge as lower input costs a relief for CGDs

The Union Cabinet’s nod on April 6 to Kirit Parikh Committee’s recommendations for the pricing of natural gas helped shares of gas companies climb higher on April 10. At 9:45 am, shares of Indraprastha Gas Ltd (IGL), Mahanagar Gas Ltd (MGL), Gujarat Gas, Adani Total Gas and GAIL India were trading 1-5 percent higher on the BSE.

The Union Cabinet on Thursday approved revised domestic gas pricing guidelines. Union Information and Broadcasting Minister Anurag Thakur said in a press briefing that domestic gas pricing will now be linked to imported crude pricing and would be decided at 10 percent of the Indian crude basket and will be revised on a monthly basis. At present, gas prices are decided on a six-monthly basis and based on the volume-weighted prices prevailing at four gas trading hubs – Henry Hub, Albena, National Balancing Point (UK), and Russia for a period of 12 months and with a time lag of a quarter.

Domestic gas prices are currently at $8.57 per mmBtu as of April 1, with the adoption of the new pricing mechanism, gas prices are expected to see an immediate cut.

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The government had constituted the Kirit Parikh Committee to look into the gas pricing mechanism, as Administered Price Mechanism (APM) prices had risen to $8.6 per mmBtu in the October 2022- March 2023 period, making CNG costlier than dirtier alternative fuels in few cities, Motilal Oswal Financial Services said.

Post the development, CGD companies have announced a cut in CNG and PNG prices over the weekend. Analysts believe this could help city gas distribution companies ramp up volumes going ahead.

“While the recommendations will help CGDs (city gas distributors) reduce their input costs in the near term, we do not expect margin accretion for CGDs as the benefit is expected to be passed on to consumers. Moreover, the implementation of the floor price will increase the gas cost for CGDs in the long run, as under the previous gas pricing regime, APM gas prices were higher than $4 per mmBtu in only three out 16 periods due to high weightage of cheap Henry Hub gas,” it added.

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Motilal Oswal has retained its ‘sell’ rating on IGL as the threat posed by EVs to the long-term growth potential of the company poses a huge risk to its valuation. It has a ‘buy’ call on MGL due to its attractive valuations while Gujarat Gas remains its preferred pick among CGDs owing to its higher industrial exposure.

After the new gas pricing formula is announced, CLSA has a ‘buy’ recommendation on IGL, MGL and GAIL India. Despite the price cuts, calculations suggest attractive spot unit margin for MGL and IGL, it said while adding that the discount of against Diesel has risen to 30 percent which brings back pricing power.

Jefferies has maintained IGL as its top pick with a target price of Rs 540 and has a ‘hold’ rating on MGL and GAIL shares and ‘underperform’ stance on Gujarat Gas. The foreign brokerage firm sees city gas companies benefiting from feedstock cost relief.

GAIL gets Rs 1,100 crore annualised saving in LPG feedstock cost, Jefferies said. The brokerage firm has upgraded FY24 EBITDA estimates for IGL, MGL and Gujarat Gas by 20 percent, 19 percent and 6 percent, respectively.