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Friday, December 9, 2022

Natural gas price hike negative for GAIL, IGL, marginal beneficiary is RIL: Jefferies

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The decision by the central government to increase the domestically regulated pricing mechanism (APM) gas price will negate the benefit of increased APM gas allocation to compressed natural gas (CNG) players, Jefferies said in a report.



In a report, Jefferies said CNG players have limited room to raise prices given the deteriorating economy.

According to the report, GAIL, Indraprastha Gas and Mahanagar Gas are the main losers, Reliance Industries Ltd could be a marginal beneficiary.

The allocation of high-pressure and high-temperature gas (HPHT) from Reliance Industries’ KG field by the end of 2022 and a new pricing formula from a government-appointed commission may offer some respite.

The APM gas price has been revised from $6.26/mmbtu (effective) to $8.57/mmbtu, while the HPHT gas price has been revised from $9.9/mmbtu to $12.5/mmbtu.

The government-appointed committee headed by Kirit Parikh has been asked to submit its recommendation on domestic gas pricing in mid-October.

Jefferoes said Indraprastha Gas should increase CNG price by about Rs 8/kg and Mahanagar Gas at Rs 9/kg to pass on the impact of raw material cost increase.

This would reduce the CNG discount on petrol/diesel from about 45/30 percent to about 40/20 percent for Indraprastha and Mahanagar.

This may have consequences for volume growth. In front of Gujarat Gasthe impact will be relatively small, as the priority sector makes up only about 25 percent of the total volume, Jefferies said.

The increase in APM gas costs roughly offsets the benefit of a higher allocation (94 percent from 85 percent earlier) announced in August for the city gas distributors (CGD). GAIL’s raw material costs for LPG business are increasing, even as LPG prices fall further hurting profitability.

Sustained availability of 94 percent of APM pool’s CNG need by diverting volumes from other segments, access to RIL’s KG basin gas through the bidding process and pricing strategy will determine the volume trajectory. We believe growing volume through incremental deliveries at spot prices, profit is dilutive,” Jefferies said.

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