City gas distributors likely to see limited upside in the near-term

The new administered pricing mechanism (or APM) gas-pricing formula caps the potential upside on gas costs and offers pricing stability for two years. This has meant price cuts and if passed onto consumers by city gas distributors (CGD) could boost demand slightly. 

While share prices for the CGD players have responded favourably on the whole to change in policy, analysts have flagged the potential threat of EV (electric vehicle) penetration. This is more likely to impact Indraprastha Gas (IGL) in the short to medium term, given the relatively rapid adoption of EVs in Delhi, which is India’s largest vehicle market. The industrial segment will probably see a revival in volumes, however, going by the example of Gujarat. 

In terms of financials, Mahanagar Gas (MGL) reported a strong January-March quarter performance for the 2022-23 financial year (Q4FY23) with Ebitda (earnings before interest, tax, depreciation and amortization) and PAT (profit after tax) rising by 80.9 per cent and 104 per cent year-on-year (YoY), respectively, and by 52 per cent and 56 per cent quarter-on-quarter (QoQ), respectively, led by strong expansion of Ebitda per scm (standard cubic metre).

The company reported Q4 Ebitda per scm at Rs 12.8, up 70 per cent YoY and up 57.4 per cent QoQ. Gas costs were up 38 per cent YoY and declined 13 per cent QoQ. The Ukraine war started in late February 2022 so, the big gas price spike came through March 2022 and continued through Q2FY23 and Q3FY23. The QoQ decline also indicates that gas price may have stabilised with Europe finding alternatives sources. 

During FY23, MGL invested over Rs 580 crore in expanding its pipeline network as well as CNG stations. Management guidance is between Rs 550 and Rs 600 crore capex in FY24. MGL maintains guidance of about 6 per cent volume compound annual growth rate (CAGR) over the next 3-5 years. One analysis uses discounted cash flow valuations to set a target price of Rs 1,141. MGL serves 4,465 industrial customers and 2.08 million households. 

IGL, meanwhile, saw volumes go up 1.7 per cent QoQ to 8.25 mmscmd (million standard cubic metres per day), which was in line with expectation. However, gross margin per scm disappointed the Street. It was up 5.9 per cent QoQ but 6.2 per cent lower YoY. Gas prices were higher than expected. The Ebitda per scm increased 9.1 per cent QoQ and was down 14.1 per cent YoY to Rs 6.0. The firm reported 8.8 per cent increase in Q4FY23 Ebitda to Rs 470 crore, while PAT rose 18.5 per cent YoY to Rs 330 crore. Guidance was for 1 mmscmd volume growth within a year and Ebitda per scm of Rs 7.5-8.0 for FY24. The 12-month target price is around Rs 572 assuming better volume visibility and lower gas costs. 

Some analysts believe the new APM formula provides only short-term respite and demand may not revive very much. As CGD gas costs for the priority segment rises, the price advantage and arbitrage versus petrol and diesel will erode. The EV threat is significant and IGL is more vulnerable. There are some ‘sell’ calls on IGL stock. 

In Q4FY23, Gujarat Gas (GGCL) reported PAT of Rs 371 crore due to better gas off-take after correction in international prices. Overall gas volume grew by 22 per cent QoQ (partly due to low base effect). Higher volume sequentially led to overall revenue growth of 7 per cent QoQ to Rs 4,074 crore. The average realisation was lower by 10 per cent QoQ and 5 per cent YoY to Rs 51 per scm in Q4FY23 as GGCL passed on lower LNG (liquified natural gas) prices to industrial consumers.

Volumes were down by 10 per cent YoY but rebounded sharply up 22 per cent QoQ owing to a 75 per cent QoQ rise in Morbi volumes. Target prices remain in the Rs 520 range.