Margin woes emerge for gas distribution companies in Q3 but volumes improve

IGL, Gujarat Gas and MGL have seen profitability contract in Q3

Gas distributors Indraprastha Gas (IGL), Gujarat Gas and Mahanagar Gas (MGL) all declared results for Q3FY22 recently. The story was more or less the same across the three companies. While there were some volume gains, there was sharp margin contractions due to the rising price of LNG. The margin contractions were expected and some investors may write them off as caused by extraordinary combination of geopolitical uncertainties (triggered by the Ukraine tensions) and seasonal demands.

The volume rise is encouraging. If prices soften, this is a positive situation going forward, where margins recover and combine to higher volumes to deliver bottom-line growth. But if margins pressure continues, there could be more misses to estimates. All three companies will be hit if the allocation of domestic gas is cut, or if there is a sharp upwards revision of domestic gas prices.

For Gujarat Gas (GGL), which is an industrial supplier, the downside risks could be especially steep in case of high prices. Many customers in the ceramics hub of Morbi have shut down operations precisely due to high gas prices. Right now, there is enough demand growth since new units have also opened, and GGL will be handling the Mehsana-Bhatinda pipeline (which has been transferred to GGL from GSPL) and may also benefit from new demand in Bhatinda. However, higher gas prices could mean a drop in future demand as well. On the upside, the Green Tribunal ban of coal usage in gasifiers in Morbi will drive demand.

For IGL and MGL, the downside risks are different. One risk is greater penetration and uptake of electrical vehicles, which could mean a switch from CNG but this may not be a near-term fear. Despite rise in CNG prices, gas is at a big discount compared to petrol and diesel and therefore this will not impact demand so much. CNG remains 30-50 per cent cheaper than other fuels. There is also an upside for volumes since CNG penetration of vehicles is still relatively low.

GGL’s standalone EBITDA  was Rs 240 crore which was well below consensus expectations of Rs 320 crore. Sales volume was 3 per cent above expectations but it has fallen from 11.4 mmscmd in Q3 to just above 10 mmscmd – a possible sign of demand being impacted by high prices. The EBITDA margin dipped to Rs 2.3 per scm in Q3FY22 (vs. Rs 4.0 per scm in Q2FY22).

For IGL, volumes rose 6 per cent QoQ and 22 per cent YoY. But EBITDA at Rs 470 crore declined 6 per cent yoy and 11 per cent qoq as a result of high prices. Unit EBITDA declined 16 per cent QoQ to Rs 6.7 per scm. Net income declined 23 per cent qoq to Rs 310 crore. Volumes are now substantially above pre-covid levels.

For MGL, the Q3 EBITDA of Rs 100 crore was much lower than consensus of Rs 260 crore and margins declined to Rs 3.4 per scm versus Rs 10.5 per scm in Q2FY22. Sales volume rose 5.7 per cent QoQ to 3.3 mmscmd, led by CNG sales volume (up 7.1 per cent QoQ).

The high prices could present a possible negative risk for the near-term. Summer will lead to reduced demand but fears of supply disruption due to tensions with Russia are hard to assess and remain a factor.

Most analysts seem to have more or less discounted the trend of rising volumes versus lower margins and maintain outperform ratings on the sector. Most analysts have however, lowered target prices for the three companies. All three companies have seen sell offs since the results.