Home >Markets >Mark To Market >Low and stable gas prices result in huge gains for IGL, MGL

City gas distribution (CGD) companies have continued to stay in favour with investors on the back of strong gas demand growth and firm earnings prospects. Domestic gas prices have remained unchanged during a recent review for the April-September period. The stable gas price environment bodes well for CGD companies from a demand perspective, and is also supportive of their margin profile.

Rising prices of petrol and diesel have made compressed natural gas (CNG) used by automobiles a cheaper fuel option. This is in addition to rising demand for piped natural gas (PNG) from households and the industrial sector. Besides, geographical expansions being undertaken by the CGD companies add to volumes as well.

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“The stability coupled with low gas prices comes at a good time for CNG and PNG users as the price of petrol and diesel is extremely high due to the taxes levied, while prices of LPG (liquefied petroleum gas) too have been on a rise with the recovery in oil prices" said CARE Ratings in a note.

CNG is 45-60% cheaper than petrol and diesel. Given the volatility in petrol and diesel prices, more users are shifting to CNG-powered vehicles. PNG too is a 40% cheaper than commercial LPG prices.

Among the CGD operators, Indraprastha Gas Ltd (IGL) and Mahanagar Gas Ltd (MGL) are the biggest beneficiaries of lower domestic gas prices as they are more dependent on domestic gas, point out analysts. Gujarat Gas, on the other hand, uses more imported gas. However, Gujarat Gas has a greater share of industrial users. Hence, if spot gas prices sustain, the company can negotiate pricing with consumers. Further, industrial demand is seeing a strong surge and there is scope for expanding supplies to more clusters in Gujarat.

“We believe that the secular gas consumption theme would gain further momentum and expect CGD players to continue with its trend of double-digit volume growth over coming years" said Abhijeet Bora, research analyst at Sharekhan.

The companies are expected to report strong earnings growth year-on-year during Q4 with volumes exceeding the pre-covid levels. Ebitda margin is expected to improve for IGL and MGL thanks to better operating leverage. Gujarat Gas, nevertheless, may see some contraction in margins/earnings on a sequential basis due to the impact of higher spot LNG prices in January-February. The company may, however, post 10.4% year-on-year growth in net profit during Q4, according to analysts. IGL and MGL may report healthier 39-46% growth in net profit, analysts estimate.

Meanwhile, the impact of the second wave of covid-19 needs to be watched for. For now, analysts still do not see any meaningful impact on the volume growth story for CGD firms.

Having gained 31-75% in the last six months, IGL, MGL and Gujarat Gas are trading near their recent highs.

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