The recent reduction in compressed natural gas (CNG) prices by city gas retailers in Delhi and Mumbai — Indraprastha Gas (IGL) and Mahanagar Gas (MGL), respectively — are unlikely to impact the margins and profitability of these companies, according to analysts.
The price cuts have been in line with the softening of the spot LNG (liquefied natural gas) prices and would hardly pinch CGD companies’ margins, ICICI Securities said in its latest report.
Last week, both MGL and IGL announced a cut of Rs 2.5 per kg in the retail prices of CNG. Prices of LNG have currently been trading below $9 per MMbtu against the average price of $15.2 per MMbtu in the third quarter of the current financial year.
“IGL’s gross margin is likely to see upside risk to our FY25E of Rs 13.6 per scm (standard cubic meter) and MGL should see little impact against our estimates of Rs 19.2 per scm,” the analysts at ICICI Securities said.
On the contrary, the brokerage firm expects the price reduction to boost the volume of CNG vehicles. “After these cuts on CNG prices, CNG trades at approximately 50% discount to petrol and around 40% to diesel. These should help boost CNG vehicle conversion and drive volume momentum.”
Moreover, new competition may find it difficult to enter the Maharashtra Metropolitan Region even as the Petroleum and Natural Gas Regulatory Board (PNGRB) has announced the end of MGL’s monopoly in the region owing to scarce availability of gas and land for CNG stations, and the threat of MGL reciprocating by entering the competition’s authorised areas, the report said.
“We factor in 5-6% volume growth for MGL over the medium term. We see some moderation in margins over the next two-three years, and estimate Ebitda per scm of Rs 14.6 for FY24, 13.6 for FY25, and 13.1 for FY26.”
IGL’s profit margins for the last four years have been around 15-16%, while MGL has registered profit margins of around 19-20% only in the last two years.
Further, the sustained moderation in the Asian spot LNG prices is positive for all gas companies, as highlighted in a latest report by JM Financial Institutional Securities, as lower LNG prices will lead to gas supply prices becoming more competitive against alternative liquid fuels.
Due to weak demand and excessive inventory in both Asia and Europe, the price of Asian spot LNG has dropped to a three-year low of about $ 8.3 per MMbtu, or 10% of Brent (compared with the historical average of about 15%), according to the JM Financial report.