Analysts decode impact of PNGRB tariff regulation changes on IGL, MGL

PNGRB tariff news: While analysts see IGL benefitting the most from the changes due to the possibility of charging higher tariffs, MGL and GGL may be negatively impacted, they said

IGL, MGL share price: The recent changes, introduced by the Petroleum and Natural Gas Regulatory Board (PNGRB), related to pipeline tariff regulations will have a mixed impact on related players such as Indraprastha Gas (IGL), Mahanagar Gas (MGL), and Gujarat Gas (GGL), analysts said on Monday.

 

While they see IGL benefitting the most from the changes due to the possibility of charging higher tariffs, MGL and GGL may be negatively impacted, they said.

 

What are the proposed changes in PNGRB tariffs?

PNGRB, on Friday, reduced the number of pipeline tariff zones from three to two to make natural gas more accessible and affordable for areas which are far from the gas sources. This, the Board said, also reduces the transportation cost for long distance consumers.

 

According to analysts at ICICI Securities, the current tariff for Zone 1, Zone 2, and Zone 3 is ₹42.04, ₹80.08, and ₹106.77 per mmbtu, respectively.

 

The prices vary according to the distance from the gas sourcing point, which is up to 300 kilometers for Zone 1, between 300 and 1,200 km for Zone 2, and beyond 1,200 km for Zone 3.

 

"Thus, reduction from three zones to two zones might lead to higher tariff for nearby destinations vs earlier to arrive at the same IRR for tariff calculation by PNGRB," the brokerage said.

 

Zone 1 tariffs to be extended nationwide to CNG, domestic PNG

PNGRB's notification on tariffs also said that gas distributors shall charge Zone 1 tariffs for nationwide usage of CNG and domestic PNG. This means, irrespective of the distance between gas sourcing and destination, tariff would be the same.

 

What will be the new Zone 1 and Zone 2 tariffs for gas companies?

According to initial estimates by global brokerage Nomura, new Zone 1 tariff will be ₹61.3 per mmbtu, with 43 per cent volume being sourced from this zone. New tariff for Zone 2, meanwhile, is estimated to be ₹92.7 per mmbtu, cornering 57 per cent of the total volume.

 

The brokerage assumes overall volume weighted average tariff to remain the same as before; one-fourth of volumes in Zone 2 and Zone 3, which were CGD volumes, will now be charged as per Zone 1 tariff, and; Zone 1 will be 66.17 per cent of Zone 2.

 

ICICI Securities, on its part, assumes Zone 1 tariff could increase to ₹52/mmbtu from the current ₹42.04/mmbtu. Zone 2 tariff, it said, may increase by ~₹10/mmbtu to ₹90.1/mmbtu.

 

How will the new PNGRB tariffs affect IGL, MGL, Gujarat Gas?

According to analysts at Nomura, the proposed changes will likely benefit Indraprastha Gas as the company's current gas sources fell either under Zone 2 or Zone 3.

 

"We estimate Ebitda benefit of ₹0.5/scm – ₹1.6/scm (depending on whether it currently falls in Zone 3 or Zone 2), implying 8-23 per cent higher Ebitda provided IGL is able to retain all the benefits and not pass on the same to end users," Nomura said.

 

For Mahanagar Gas, Nomura said the company could see a negative impact of ₹0.8/scm, implying 8 per cent Ebitda impact, as it is already in Zone 1, which may see upward tariff revision.

 

"Gujarat Gas, meanwhile, may see the same impact on Ebitda as MGL, at ₹0.8/scm. However, the impact in terms of percentage is higher at ~16 per cent due to a lower margin base than MGL," it said.

 

Those at ICICI Securities, meanwhile, said that the current tariff zone applicable, in case of IGL, MGL and Gujarat Gas, is Zone2-3, Zone1, and Zone1, respectively.

 

"Thus, IGL may benefit to the extent of ₹1-1.1/scm, while the higher tariffs for Zone1/2 (to keep blended tariff the same) can have negative impact of ₹0.35 and ₹0.36 per scm on MGL and Gujarat Gas, respectively," it said.

 

Investment strategy: Should you buy, sell, hold CGD stocks?

ICICI Securities has maintained ‘Buy’ on all the three names and it would wait to see the exact impact of the proposed changes before reviewing its rating.

 

Nomura, however, prefers Mahanagar Gas (Buy; target: ₹1,680), as it expects the company to have the highest volume growth among peers, and considering its limited exposure to the volatile industrial and commercial (I&C) segments, and attractive valuation compared with peers.

 

"MGL is also better placed than IGL in terms of EV-related regulatory challenges. Gujarat Gas (Reduce, target: ₹406) is our least preferred pick due to its high exposure to the I&C segment, its muted volume growth outlook, limited room for price hikes, and demanding valuation," it said.