Price hikes likely to keep prospects of CGD companies intact

Price hikes likely to keep prospects of CGD companies intact

Gujarat Gas’ dependence on industrial sales is higher compared to peers such as Indraprastha Gas Ltd (IGL) and Mahanagar Gas Ltd (MGL).2 min read . Updated: 25 Aug 2021, 11:15 PM ISTUjjvalJauhari

While we believe the price hike will be viewed positively by the market, it is essential to pass on a near quarter-on-quarter doubling in spot LNG input cost (to $16/mmbtu), said analysts

City gas distribution (CGD) company Gujarat Gas Ltd is in the news for taking a price hike of about 15% for its industrial gas sales in the Morbi region as well as some price increases in the CNG (compressed natural gas) segment.

Not without reason. The price hikes are aimed at passing on higher gas costs to customers. Spot gas prices are rising consistently. Further, domestically produced gas is also likely to see price hikes in the six-monthly review with rising spot and international gas prices. These will be applicable from 1 October.

“While we believe the price hike will be viewed positively by the market, it is essential to pass on a near quarter-on-quarter doubling in spot LNG input cost (to $16/mmbtu),” said analysts at Edelweiss Securities Ltd in a note. Mmbtu is million British thermal units and LNG is liquified natural gas. This will not only keep margin and input gas cost in check, but will also aid profitability, said the analysts.

Price hikes apart, the company has already been adjusting its gas sourcing to cope with the rising gas costs. Its efforts are directed towards changing the gas-sourcing mix towards domestic gas and contract LNG from spot LNG.

Analysts point out that the company is now sourcing more from low-cost domestically produced gas and contracting more volumes from domestic sellers.

The average cost of the gas-sourcing basket was $6.3 per mmbtu in Q1FY22 and the cost has now increased to $7.2/mmbtu in Q2FY22 till date, said Yogesh Patil, research analyst at Reliance Securities Ltd. “As per our understanding, the company has completely passed on the price increase to PNG (piped natural gas) industrial consumers and likely to maintain Ebitda per scm (standard cubic metre) of more than ₹6 in Q2FY22,” he added.

What’s more, Gujarat Gas’ volume prospects are bright. According to MotilalOswal Financial Services Ltd, the addition of new units in the Morbi region, expansions of current units, and the emergence of a new ceramic cluster could result in a volume growth surprise.

Gujarat Gas’ dependence on industrial sales is higher compared to peers such as Indraprastha Gas Ltd (IGL) and Mahanagar Gas Ltd (MGL). However, it is expanding its CNG network and plans to add 150 CNG stations in FY22, taking the total to 700 plus stations. This would make it comparable to IGL, which has a large CNG distribution network in the Delhi-NCR market.

To be sure, IGL and MGL have been sourcing more gas from the domestic market and would also need to pass on any increase in domestic gas prices. However, CNG prices are expected to stay competitive to petrol and diesel, keeping growth prospects firm. IGL sees strong growth prospects driven by rising geographical penetration. MGL, however, faces space constraints in Mumbai for new CNG stations and also growth concerns post completion of the metro rail project.

https://www.livemint.com/market/mark-to-market/price-hikes-likely-to-keep-prospects-of-cgd-companies-intact-11629913094621.html

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