City gas distribution companies stand to benefit the most if the recommendations of the Kirit Parikh committee on gas pricing are implemented, brokerages said.
The committee, which submitted its report on November 30, suggested a floor price of $4 per metric million British thermal units (mmBtu) and a cap of $6.50 per mmBtu for gas produced from legacy and old domestic fields. The cap will rise by 50 cents every year, according to the recommendations, and pricing will be deregulated from January 2027.
“If approved, CGD companies like IGL (Indraprastha Gas Ltd.) and MGL (Mahanagar Gas Ltd.) will benefit the most as priority sector accounts for over 80 percent of revenues. At a cap price of $6.5/mmBtu (currently $8.57), retail CNG (compressed natural gas) prices could be down Rs 7-8/kg,” Prabhudas Lilladher said in a report. “Margin expansion for CGDs will depend on the extent of passing on the benefit of lower gas prices.”
Pawan Kumar, commercial director of IGL, told CNBC-TV18 that if the panel’s recommendations are approved, it would be a welcome move.
“The recommendation is that the input gas cost of APM (administered pricing mechanism) gas should come down by around 24 percent. But if we see the RLNG (regasified LNG) and spot component also for IGL, the net reduction (in overall costs) will be around 18 percent,” Kumar said.
Global price rise
IGL and MGL provide CNG as auto fuel and piped natural gas (PNG) to commercial establishments and households.
Global natural gas prices have surged due to geopolitical tensions. Following the increase in global prices, the government hiked the price of gas by 40 percent to $8.57 per mmBtu for gas from old fields, which account for about two-thirds of all domestically produced gas.
“Capping of domestic gas price at $6.5/mmBtu, despite an annual increase in the ceiling by $0.5/mmBtu, is positive for the CGD sector in the near to medium term (particularly IGL and MGL, given higher dependency on domestic gas) as it is still lower than the current APM gas price of $8.57/mmBtu for 2HFY23. Hence, reduction in gas cost by ~$2/mmBtu could lead to reduction in CNG price by Rs 8-9/kg,” JM Financial said in a report. “CGD companies may partly pass this to end consumers to maintain competitiveness of CNG while partly may retain some benefit to support margins given the rising dependency on expensive spot LNG.”
According to the Kirit Parikh committee report, the cap and the floor on gas prices would be removed by January 1, 2027, and prices would be market-determined for gas currently under APM, which is set by the government.
“The floor and ceiling prices provide healthy gas realisation to upstream producers with graded increases over the next five years, moving to full decontrol from January 1, 2027,” said Prashant Vasisht, vice-president and co-head of corporate ratings at ICRA Ltd.
Brokerage Emkay said if the recommendations are implemented, it would provide respite to CGD players, with potential cuts in the retail selling price (RSP) and margins staying within the targeted range.
“IGL has taken a limited CNG RSP hike since October and, as per our estimates, current EBITDA/scm is at Rs 3-4. With lowering of APM to $6.5, IGL may be able to reduce Delhi CNG RSP by Rs 2/kg from the current Rs 78.6/kg and still recover margins to >Rs 7/scm,” Emkay said in a report.
Impact on gas producers
The recommendations would be neutral-to-positive for companies such as state-run Oil and Natural Gas Corporation and Oil India, which produce gas from oil fields, said brokerages.
“Recommendation on domestic APM gas price is neutral to positive for ONGC/Oil India in the medium term as we were factoring in net gas price realisation of $6.6/mmBtu in FY23 and $5.6/mmBtu in FY24. Unlike for the CGD sector, deregulation of domestic APM gas price from January 2027 onwards could be significantly positive for ONGC/Oil India in the long term,” said JM Financial. “Every rise in gas realisation by $0.5/mmBtu will raise ONGC/Oil India’s EPS by ~5 percent.”
The upstream companies would also benefit because the minimum price is still above production costs, said ICICI Securities.
“The report is positive for the upstream companies as well, given that the minimum floor is still above the production and development cost for ONGC and Oil India’s legacy fields and the price of $6.5 going to $8 in three years is well above historical averages for the two companies,” said Probal Sen, an analyst at ICICI Securities.
As global energy prices soared, the government set up the Kirit Parikh committee in September to review the pricing formula for gas produced in the country. The government will now deliberate on the report and consider converting it into policy.
“We have listened to all stakeholders and considered their concerns. And we have tried to balance them in the sense that we give all producers adequate returns, distributors adequate margin and consumer fair price. We didn’t want to increase any burden on the government,” energy expert and former Planning Commission (since renamed NITI Aayog) member Kirit Parikh told CNBC-TV18.
IGL shares fell 1.8 percent to Rs 433.95 at the close on the BSE on December 1. The benchmark Sensex added 0.3 percent. MGL shares were little changed at Rs 900.30.
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