Near-term concerns limit upside for city gas distribution cos

While Indraprastha Gas Ltd (IGL) stock is down 4.1% since the start of May, Gujarat Gas’ stock price has seen little change during the period. Only Mahanagar Gas (MGL) is up 3.63% but its gains still lag Sensex that is up 3.76% during the same period.

Concerns have been raised around expected auto fuel price cuts by oil marketing companies (OMCs), that can add to near-term volume challenges for CGD companies. Although compressed natural gas (CNG) finds favour being a cleaner and cheaper fuel compared to other alternatives, any decline in auto fuel prices—petrol and diesel—can reduce the price differential with CNG. This may have some sentimental negative impact on stock prices, too.

The focus on electric vehicle (EV) conversion and the draft cab aggregator policy in Delhi, which though yet to be finalised, is looked at as another major overhang and concern for IGL as it impacts its volume growth outlook.

Further the decline in propane gas prices has also impacted Gujarat Gas’ near-term volume growth prospects as industrial users have shifted to propane usage over natural gas. The performance of CGDs during Q4, too, did not show much spark, with only MGL earnings having beaten analyst estimates. Analysts at ICICI Securities said the three CGD companies delivered flat Ebitda and 2% y-o-y higher net profit during Q4. However, their y-o-y performance was driven entirely by the massive 81% and 104% jump in Ebitda and net profit, respectively, of MGL. IGL and Gujarat Gas both saw the high base of Q4 FY22 and stronger gas costs impact earnings for Q4FY23, said analysts. Ebitda stands for earnings before interest, taxes, depreciation, and amortization.

However, analysts still maintain a positive outlook and say that a regular decline in natural gas prices over the recent past and the favourable administered price mechanism (APM) gas price cuts have already improved the margins outlook for the companies.

Analysts at Antique Stock Broking said margins of CGD companies remain well placed after the APM price cut. They said although vehicle conversion is yet to pick up meaningfully, green shoots are visible and the current price arbitrage versus liquid fuels remains extremely attractive to drive conversion.

Analysts expect CNG vehicle conversion to further catch pace driving growth for CGDs.

Analysts feel that a possible cut in petrol and diesel prices may hit the margins of arbitrage for IGL, MGL, However, MGL has sufficient cushion given its current high margins. Nevertheless, volumes for both companies have started improving, added analysts.

Yogesh Patil, vice-president of research at Dolat Capital, said the cut in CNG prices enhanced the economics of CNG versus petrol and diesel, and vehicle addition is likely to improve.

APM price cap strengthens volume assumptions for the CGDs and hence, Patil expects IGL and MGL’s CNG volume to clock 10% and 6% CAGR (compound annual growth rate) over FY23-25. Patil expects no impact on CNG if auto fuel prices are cut.

Analysts at Antique also said current CNG price arbitrage versus diesel and petrol in Delhi is 18% and 24%, respectively, which would go down to 14% and 21% with a ₹4 per litre cut in the diesel and petrol prices. However, it would still remain favourable.

Gujarat Gas, with a high exposure to industrial supplies for gas, is therefore expected to see some challenges persist due to a decline in propane prices.

Analysts at ICICI Securities said Gujarat Gas current volume in Morbi is likely to be around 4.5 million metric standard cubic meters per day (mmscmd)—of a total industrial volume of about 6.5 mmscmd—and could remain depressed for a couple of months more as international propane prices continue to remain low and spot LNG prices have increased from their recent lows. Propane prices are likely to increase during the winter as seasonality kicks in, potentially bringing back the volume to Gujarat Gas.

However, the draft cab aggregator policy in Delhi, that recommends conversion of the entire cab aggregator fleet to electric by April 2030, remains a concern. Nevertheless, the policy is yet to be finalised, analysts said, and the implementation may also take time. The target looks steep and may pose a threat to 15% of IGL’s current volume by 2030, said analysts at Antique. They added that the impact will be back-ended with not more than 4–5% of the current volume being impacted over the next four years.