High gas prices weigh on Q3 results of city gas distributors

Results of city gas distribution (CGD) companies were affected by high gas prices in the third quarter of the financial year 2023.

While Indraprastha Gas Limited (IGL) reported a decline in net profit in Q3, Mahanagar Gas Limited (MGL) and Gujarat Gas Limited (GGL) missed on volume expectations in the quarter.

However, MGL and GGL reported stronger-than-expected margins.
The government of India had hiked natural gas prices by a steep 40 percent to record levels on October 1, 2022 in sync with the high energy rates globally.

The rate paid for gas produced from old fields, which accounts for about two-thirds of all gas produced in the country, was hiked to $8.57 per metric million British thermal unit (mmBtu) from $6.1.

IGL

In the third quarter of financial year 2022-23, IGL reported an 11 percent year-on-year (YoY) drop in consolidated net profit at Rs 334.06 crore on account of higher gas costs.

Despite higher volumes in the quarter, the gas distributor missed market estimates due to lower margins.

“The miss was due to higher gas costs leading to lower margins impacting EBITDA (earnings before interest, taxes, depreciation, and amortisation) even as volumes at 8.01 mmscmd (million metric standard cubic meters per day) were up 5.5 percent YoY. Average sales realisation stood at Rs 50/scm, up 59 percent YoY and 4.6 percent QoQ. IGL had taken a price hike of Rs 4.7/scm in domestic PNG in Q2FY23 and it further increased CNG price by Rs 3/kg and domestic PNG price by Rs 3/scm on 8 October 2022 to partly pass on the $2.8/mmBtu increase in domestic gas prices,” said ICICI Securities in a note.

MGL

MGL beat the impact of high prices and reported stronger-than-expected results in Q3 as the company hiked compressed natural gas (CNG) prices.

The company posted growth of 203 percent YoY in consolidated net profit at Rs 172.07 crore in Q3FY23 compared to Rs 56.79 crore in the previous year.

MGL hiked prices by Rs 9.5 per kg for CNG and Rs 5.5/scm for domestic PNG in the quarter. However, the company missed expectations on volumes.

“The gross margin improved despite increase in APM gas prices, which the company passed on. The company was expecting the Kirit Parikh committee to reduce APM gas prices; this did not come through. It hiked prices in October 2022 (from Rs 80/kg to Rs 86) and in November 2022 (to Rs 89.5), which, with falling crude and spot LNG prices, would improve spreads in Q4. We retain a Buy rating on the stock with an unchanged TP of Rs 1,090, at 11x FY25e EPS,” said Anand Rathi Research in a report.

GGL

Gujarat Gas also beat market expectations on margins but posted weak volumes in the quarter due to high gas prices.

The gas distribution company reported growth of 204.48 percent YoY in net profit of Rs 371.26 crore in the quarter.

Volumes at GGL in the quarter stood at 7.29 mmscmd, which is a decline of 36 percent on a yearly basis.

“Total gas sales stood QoQ & YoY lower at 7.29 mmscmd (-36 percent YoY; - 4.3 percent QoQ) primarily on weaker sales at Morbi (~2 mmscmd); with Industrial sales at 4.41 mmscmd (-52 percent YoY; -9.4 percent QoQ); CNG: 2.43 mmscmd (+12 percent YoY; +5 percent QoQ); PNG Domestic: 0.67 mmscmd (Flat YoY; -3 percent QoQ) and PNG commercial at 0.14 mmscmd (Flat YoY & QoQ),” said YES Securities in a note.

Q4 Outlook

Analysts expect an increase in volumes for GGL in the fourth quarter due to pick-up in industrial demand.

“We are not expecting a significant change in the quarterly run rate of IGL and MGL gas volume in Q4FY23 due to their retail presence, which is more stable compared to the industrial segment. However, industrial production at Morbi (Gujarat) is expected to pick up in Q4FY23 due to an increase in construction and infrastructure activities. It could increase the demand for natural gas in the industrial belt, and therefore GGL’s Q4 volumes may pick up sharply,” said Vinit Bolinjkar, Head of Research, Ventura Securities.

Relief to CGD companies in Q4 is also expected if the recommendations of the Kirit Parekh committee are accepted.

On November 30, the Kirit Parekh committee had recommended a floor of $4/mmBtu and a cap of $6.50/mmBtu for legacy and old fields being operated by Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL). The report also recommended the removal of the cap and the floor by January 1, 2027 and the prices to be made market-determined for gas.