The ongoing sharp price hikes taken by CGD companies keep us comfortable on the near term margin outlook despite the sharp rise in domestic APM gas cost in Apr-22. But pricing momentum needs to be sustained especially given another sharp rise ahead in Oct-22E and a delay in resolving the APM allocation shortfall issue. Maintain Buy on IGL, GUJGA and MAHGL. IGL remains our preferred pick while we note a softer near-term outlook for GUJGA.
APM rose sharply in April: APM gas cost rose from $2.9 to $6.1/mmbtu in Apr while another sharp rise to $9.2/mmbtu GCV is likely in Oct driven by the spike in European gas prices. Meanwhile, a potential resolution of APM gas allocation shortfall would also be closely watched.
Initiative taken by IGL in price hikes: IGL has raised CNG prices by Rs 9/kg since 1st Apr taking the cumulative hike since Jan to Rs 16/kg (prices were hiked by another Rs 2.5/kg with effect from Thursday). Our analysis suggests that IGL is baking in a 7.5% shortfall at $6.1 APM. This gives us comfort on the near term margin outlook for IGL while the discount for CNG vis-a-vis petrol/diesel remains attractive at 59%/47% helped by higher crude.
As for MAHGL, a complete VAT reduction pass-through followed by a Rs 7/kg hike makes effective hike since 31st Mar at Rs 1/kg (firm raised prices by another Rs 5/kg with effect from Wednesday) which only bakes in a complete APM allocation at $6.1/mmbtu. The discount for CNG vis-a-vis petrol/diesel stands at a steep 61%/46% currently leaving significant room for further likely hikes.
Sharp price hikes by GUJGA too but industrial segment matters more: The sharp price hikes taken by GUJGA in CNG already appear to factor in ~ 15% APM gas shortfall at $6.1/mmbtu GCV. But the near term outlook looks soft with elevated Spot LNG prices prompting GUJGA to keep Morbi volumes (~ 60% of steady state volumes) at 40% below past peaks. A delayed recovery in volumes coupled with a cut in margins led to our recent 30% cut in FY23e EPS. Even so, the longer term outlook appears resilient for the company.