The Kirit Parikh Committee has submitted its report on prices of natural gas, which recommended a cap of $4-6.5 per mmBtu for gas produced from older fields by ONGC and Oil India, with cap rising $0.5 per mmBtu every year and a deregulation from January 2027.
To promote new investment, the committee suggested gas produced from new fields should given pricing and marketing freedom. Analysts sees the development quite positive for ONGC and Oil India. The recommendations, if implemented, would be short term positive, but long-term negative for city gas distributors (CGDs), they said.
In the short term, capping is seen positive, as CGDs will benefit from lower domestic and spot LNG prices at current market price, but the benefit of the decrease in APM gas price is to be passed on to consumers and, hence, the margin of CGDs may not rise as a result of this reduction.
“We believe capping of domestic APM gas price at $6.5 per mmBtu, which is lower than current APM gas price of $8.57 per mmBtu, is positive for the CGD sector in the near to medium term,” said JM Financial.
“However, CGD sector competitiveness could be hurt in the long term if domestic APM gas price is deregulated. We believe there is low probability over its eventual implementation given the detrimental impact on key consumers segments (CGD and Fertiliser sectors),” it said.
JM Financial said recommendation on domestic APM gas price is neutral-to-positive for ONGC and Oil India in the medium term as it was factoring in net gas price realisation of $6.6 per mmBtu in FY23 and $5.6 per mmBtu in FY24.
“Unlike for the CGD sector, deregulation of domestic APM gas price from Jan’27 onwards could be significantly positive for ONGC/Oil India in the long term. Despite high global gas price posing near-term headwinds to margin/volume, we maintain BUY on IGL (target Rs 500), Gujarat Gas (Rs 600) and MGL (Rs 1,000). We maintain BUY on ONGC (Rs 205) and Oil India (Rs 250) given strong dividend play,” it said.
“Domestic APM blended with other higher cost gases for the shortfall may not provide significant savings against auto fuels,” Motilal Oswal said. The brokerage is neutral on IGL with a target price of Rs 406. It has a ‘Buy’ call on Mahanagar Gas, given its attractive valuations. Gujarat Gas, Motilal Oswal said, is its preferred pick due to its higher industrial exposure.
Motilal Oswal said the recommendations will raise gas prices for the CNG segment of companies and will be negative. ONGC and Oil India will be guaranteed a minimum $4 per mmBtu for their APM gas, it said suggesting the recommendations provided a big relief to ONGC and Oil India as they had to produce gas below the cost of production for quite a long time.
“The recommendations will be positive for ONGC and Oil India and negative for CGDs like IGL and MGL, which will be the most adversely impacted,” it said.
Kotak Institutional Equities said when the APM price was increased from $6.1 to $8.6 per mmBtu, expecting relief from the Kirit Parikh panel, most CGDs did not take the required price hikes. Compared to required hike of Rs 12-14/kg, IGL raised prices by Rs 3 per kg, MGL by Rs 9.5 per kg, while a few CGDs (such as Gujarat Gas) kept the price unchanged. As such, IGL and MGL’s margins declined sequentially in Q2FY23.
“In our view, at a price of $6.5/mmBtu itself, APM gas is unaffordable for price-sensitive segments such as power and CGDs. Further annual increase in ceiling price by $0.5 per mmBtu and suggested eventual linkage to oil prices at 10 per cent slope can stall CGD investments,” it said.
India’s gas consumption has not grown over the past 10-11 years, Only CGDs’ consumption has grown 2.5 times driven by low APM price, 100 per cent allocation, and also de-regulated petrol/diesel prices for several years.
“Now, with APM prices being high, allocation not 100 per cent, and petrol/diesel prices being frozen, the CGD growth can also significantly slow down. While the impact may be lower for legacy CGDs (such as IGL, MGL, or Gujarat Gas), we think the planned investment in new CGDs can stall,” it said.
Emkay Global said a move towards market-linked pricing is structurally positive for upstream and a floor of USD4/mmbtu will support earnings in case of a downcycle.
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