By Nomura research
Kirit Parikh committee has recommended significant changes to India’s domestic gas pricing regime says media reports. The committee submitted its report to the ministry of petroleum and natural gas last week. The ministry will process the recommendations and seek Cabinet nod to effect changes to the existing gas pricing regime.
City gas distributors (CGDs,) in our view, are key beneficiaries from the Kirit Parikh committee’s recommendations— implementing a ceiling price enables a 24% cut in input gas prices for the CGDs priority sector (CNG and domestic PNG) volumes – 80% for IGL, 85% for MGL and 25% for GGL as of FY2022. The annual escalation of $0.5/mmbtu also shields the sector from an otherwise significant uptick in input cost in FY24F; given long-drawn geopolitical issues and the European gas crisis, domestic gas prices were set to rise 48% to $12.5/ mmbtu in 1HFY24 from 2HFY23 levels. The enforcement of the ceiling prices lifts a key overhang for IGL and MGL and greatly improves visibility for earnings over the next five years, in our view.
The CGDs can effectively cut CNG prices by upto ~Rs 9/scm if they were to fully pass on the benefits of lower input gas prices. We believe the CGDs will retain some benefit from the upcoming cut in domestic gas prices and raise unit Ebitda margins to make up for lower margins in earlier quarters. We note that our FY24F EPS estimates for IGL and MGL have 5% and 6% upside to base case earnings, respectively.
In our opinion, the recommendations significantly improve visibility on the margin outlook for the CGDs and fully ease concerns on price hikes, as domestic gas prices are set to increase by only $0.5/ mmbtu on an annual basis according to the new ceiling prices.
We reiterate our Buy ratings on IGL and MGL, as the recommendations of the committee signify the lifting of a material overhang, and the supportive policy framework considerably eases margin pressure and improves visibility on profitability for the CGDs. We note that the benefits from the outcome of the committee would be lower for GGL given its significantly lower share of volumes from the priority segment. The outlook for GGL remains weak given its dependence on industrial volumes stemming from the Morbi cluster, which is severely impacted given that gas demand from the Morbi cluster is underpinned by switching to alternate fuels amid elevated gas prices.