New Delhi City Gas Distribution (CGD) companies, which had garnered investor favor due to low gas prices in 2021, have seen a huge correction in their stock prices recently.
Shares of Gujarat Gas Ltd, Indraprastha Gas Ltd and Mahanagar Gas Ltd are down 37-42% from their 52-week highs following rise in oil and gas prices, which will impact profitability.
Some brokerage firms have also downgraded stocks on weak earnings expectations. Also, a section of analysts is maintaining a cautious stance.
Credit Suisse recently downgraded CGD companies. “Shares are down more than 30%, but are still holding stable margins (IGL and MGL), or expanding margins (Gujarat Gas),” Credit Suisse analysts said in a report on April 29. With margin pressure, the brokerage said, companies may not see earnings growth for two more years. It expects a decline of over 20% over the consensus estimates for FY24.
According to Credit Suisse, the pressure is on compressed natural gas (CNG) and residential piped natural gas (PNG) with an Ebitda of 85-90% for IGL, 85% for MGL and 45% for Gujarat gas.
Rising international gas prices had a massive impact on the prices of domestically produced gas. Domestic gas prices stood at $1.79 per mmBtu (metric million British thermal units) in the first half of FY12, and were raised by 62% in the second half of FY12. This was further revised to $6.1 per mmBtu with effect from April 1.
Analysts said for IGL and MGL, which are heavily dependent on domestic gas for CNG and PNG supplies, the pressure could mount despite regular price hikes in view of concerns over allocation of domestic gas. In the March quarter, analysts at Motilal Oswal Financial Services forecast MGL’s margin to fall to 26.4%, from 44.1% in the year-ago period. Gujarat Gas’s Ebitda margin is expected to fall to 5.3% from 16.3 per cent in the year-ago period. Estimated Ebitda per standard cubic meter for MGL, IGL and Gujarat gas 10.1, 6.2 more 2.6, down 7%, 22.5% and 48%, respectively, year-on-year (y-o-y), indicating earnings pressure. Margin pressure could increase further if companies need to mix more domestic gas with imported gas cargo to meet domestic demand.
Analysts at Credit Suisse said in their report that a sharp increase in gas imports, and contract and spot prices added to the problem.
As blending with imported gas cargo increases, being closely linked to crude oil prices, input costs will increase. Therefore, the ability to increase margins gets reduced, analysts said.
As a quick fix, the government may divert some of the gas from other fields.
However, given the rising demand, a sustainable solution requires the formation of a common pool, said analysts at Credit Suisse.