Proposed gas price revision to bring short-term relief to CGDs: Analysts

The proposed domestic gas pricing formula by Kirit Parikh panel will likely provide headroom to CGDs to reduce prices and improve margins, but this may hurt producers like ONGC, Oil India, experts say

The proposed revision in the domestic gas pricing formula by the Kirit Parikh committee is likely to benefit city gas distribution companies (CGDs) in the short term, while it may marginally hurt gas producers such as ONGC and Oil India, analysts say.  

The committee on Wednesday recommended a floor and ceiling price of $4 per mmBtu (metric million british thermal unit) and $6.50 per mmBtu, respectively, for gas produced from old or legacy fields of ONGC and Oil India.

This, experts said, is likely to provide headroom to CGDs to reduce prices and mitigate margin pressures to some extent.

“The committee’s recommendations, if accepted by the government, could be positive for CGDs in the near-term as they will have the flexibility to cut prices of CNG and PNG by 20-25 per cent, which would make these competitive against alternative fuels like petrol, diesel, and LPG,” said Deepak Jasani, head of retail research, HDFC Securities.

At the bourses, shares of gas companies including Indraprastha Gas (IGL), Mahanagar Gas (MGL), Adani Total Gas have surged 15-69 per cent since April this year. In comparison, the Nifty50 and Nifty oil & gas indices are up 7 and 9 per cent up, respectively. 

As per the existing pricing norms, the government fixes prices of gas from old fields every six months. In the latest revision for October 2022-March 2023 period, the prices were raised by 40 per cent to $8.57/MMBtu tracking the surge in global markets.

Avishek Datta, Research Analyst at Prabhusdas Lilladher, said the capping of prices will benefit IGL and MGL as domestic gas accounts for 90 per cent of priority sector--PNG (piped natural gas) and CNG (compressed natural gas)-- demand. 

“At a cap price of $6.5/mmbtu vs the current $8.57, retail CNG prices could go down by Rs 7-8 per kg. Margin expansion for CGDs will depend on the extent of passing on the benefit of lower gas prices,” he said in a note, maintaining buy ratings on IGL, MGL and hold on Gujarat Gas.

On the other hand, gas producers such as ONGC and Oil India are likely to record lower realisations due to the price cap.

As per CareEdge Ratings, the price of domestic gas would have been $10/mmbtu for FY24 based on the existing formula.

The revision, it says, will likely result in a lower realisation of at least $3.50/mmbtu, and the producers of legacy fields could see a loss of up to Rs 23,000 crore in FY24.

Long-term impact

Experts, however, are not upbeat about the long-term impact of the new pricing regime for the sector.

Those at Kotak Institutional Equities, believe that an annual increase of $0.5/mmbtu on the ceiling price with the linkage to imported crude basket (10 per cent of average previous month’s price) can stall new CGD investments. The impact will likely be lower for legacy players IGL, MGL, and Gujarat Gas.

Motilal Oswal said that the price of domestic gas would have been lower for CGDs under the existing norms if there were no global geopolitical risks. "If the recommendations are implemented, then the minimum price will be raised to $4/mmBtu, raising prices for CGDs, which will be negative for them", it said.

Meanwhile, the Kirit Parikh committee said that the minimum floor price of $4/ mmBtu will allow ONGC and Oil India certainty of covering the cost of production plus some margin.

This, analysts said, is a much-needed reprieve for these companies who had to sell natural gas at prices below their costs earlier.