Gas Utilities: Price hikes by CGD firms allay margin concerns

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.

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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.