ONGC, Oil India to gain most from gas price hike; IGL worst hit: Analysts

Analysts at Antique stock Broking said every $1/mmbtu rise in gas prices is expected to lift ONGC, and Oil India's standalone Ebitda by 4 per cent, and 7 per cent, respectively

The 40 per cent hike in gas prices under the administered price mechanism (APM) advised by the Kirit Parekh committee last week from $ 6.26/ Metric Million British Thermal Unit (mmbtu) to $8.57/mmbtu, and 26.26 per cent jump in high pressure, high temperature (HPHT) gas price to $12.5/mmbtu will have a far reaching implication. While the cost of producing fertilisers, power, and ceramic tiles etc. will go up, select upstream companies, analysts said, will reap benefits of the move. However, the proposal will need Cabinet approval.

Analysts at Antique stock Broking said every $1/mmbtu rise in gas prices is expected to lift ONGC, and Oil India's standalone earnings before interest, tax, depreciation and amortisation (Ebitda) by 4 per cent, and 7 per cent, respectively. Consequently, they have revised upwards ONGC's FY23/FY24/ FY25 EBITDA estimates by 15 per cent / 19 per cent / 4 per cent, and increased Oil India's estimates by 20 per cent/ 27 per cent/ 5 per cent, respectively while maintaining buy rating on both the counters with a target price of Rs 206 (ONGC) and Rs 333 (Oil India).

On the other hand, the hike in gas prices is likely to increase RIL’s FY23E Ebitda by around 1 per cent, said analysts at Jefferies, and have marginally revised the price target on the stock to Rs 3,100 from Rs 3,080 earlier.

Gas distribution companies

In the past one year, apart from the sharp APM gas price increase, there has been a short-fall in APM gas availability. CGDs, as a result, have been forced to make up with expensive liquefied natural gas (LNG). Including the impact of shortfall and weaker rupee, CGDs’ gas costs are now up 5.6 - 6.6x in the past one year, wrote analysts at Kotak Institutional Equities in a note.

For each $/mmbtu gas price rise, analysts said CGDs need to raise CNG price by Rs 4.7-4.9/kg. For $2.5/mmbtu price rise, and also for recent currency weakness, CGDs will need an immediate CNG price increase of Rs 12-14/kg (15-19 per cent). Specifically, IGL and Mahanagar Gas will have to hike compressed natural gas (CNG) prices by around Rs 8/kg and Rs 9/kg, said analysts at Jeffries. This, they said, would reduce CNG’s discount to gasoline/diesel from around 45 per cent/30 per cent to nearly 40 per cent/20 per cent for IGL.

"Similarly, the discount for Mahanagar Gas would reduce from around 45 per cent/30 per cent currently to nearly 40 per cent/20 per cent, which could impact volume growth. For Gujarat Gas, given priority sector constituting only 25 per cent of overall volumes, the impact would be relatively small. GAIL’s feedstock cost for LPG business increases even as LPG prices are falling further hurting profitability," wrote Bhaskar Chakraborty and Niraj Todi of Jefferies in a note.

Among the lot, analysts at Antique feel the current hike will see IGL's CNG margin decline from Rs 18/ standard cubic meter (scm) to Rs 11/scm. As a result, they have cut IGL's FY23 Ebitda by 25 per cent. Gujarat Gas, they said, also has limited ability to increase CNG prices from hereon and hence will take a margin hit from Rs 22/scm to Rs 16/scm. The impact, they believe, will be lower on the company level because of comparatively lower exposure to CNG business compared to IGL and Mahanagar Gas.

"Upstream companies' (ONGC and Oil India) valuations are highly attractive with about 13 per cent FY24 dividend yield. We reiterate BUY on upstream and GAIL, Mahanagar Gas, Gujarat Gas and maintain HOLD on IGL," wrote Varatharajan S and Kishan Mundhra of Antique Stock Broking in a recent note.