The recent increase in domestic gas allowance for CNG allowed Indraprastha Gas Limited (IGL)/Mahanagar Gas Limited (MGL) to defend their respective Ebitda per scm up to $70/60 per mmbtu Spot Price (in assuming the APM price is capped at the current level). Gujarat Gas (GUJGA) could surprise positively if it receives its contractual spot volumes in S2FY23. However, we see a 7-22% profit downside risk if GUJGA fails to source the Vol @$30 Spot contract.
The government allocates a higher share of domestic gas to CNG: The Ministry of Oil and Gas has allocated a higher volume of domestic gas to the CGD priority sector (domestic PNG + CNG) by diverting gas destined for industries. As a result, the overall domestic gas allowance was increased to 20.8 mmscmd, sufficient to meet around 94% of CNG demand (from around 85%). The cost of gas fell by about 40%, from $10.5/mmbtu to $6.26/mmbtu. IGL and MGL would be the main beneficiaries, with the priority sector contributing around 70% of their respective volumes.
More possible government support in the CNG segment: We see the likelihood that the government will cap the price of APM gas at the current level and possibly reserve some HP/HT gas from the KG basin for the CNG sector.
Also read: What is the future of stock brokerage technology? BSE Commercial Director Explains
LNG spot markets in a storm: Although the higher allocation of domestic gas is positive, the increase in LNG prices could lead to a shortage of supply in financial year H2FY23E, as Indian buyers could be excluded from spot markets. LNG spot prices reached record levels (> $70/mmbtu). A colder European winter could keep the spot price near the current level on H2FY23E.
GUJGA may be forced to reduce volumes: With around 70% of I/C volumes, we believe there is a risk that GUJGA may be forced to reduce Morbi volume to ~3.6 mmscmd to protect margins. ‘it does not reach the Spot volumes contracted until February. -23. The contract is offered at an attractive price of around $30/mmbtu, but we see supply risks if Spot LNG prevails at the current level at H2FY23. Although we expect a profit upside risk of around 17% if GUJGA succeeds in procuring Spot LNG at $30, this could reverse with a profit downside risk of around 15-20% if it is to get Spot on the market.
IGL could defend its margins up to $70 Spot if the APM gas price is capped: Assuming domestic gas allocation continues at 94%, APM gas prices are capped and the retail price remains unchanged, we see IGL’s EBITDA/scm protected down to the LNG spot price of $70/mmbtu.
MGL could defend its margins up to $60 spot if the APM price is capped: assuming domestic gas allocation continues, APM gas prices are capped, and there are no more price increases, we see MGL maintaining margins near historical averages through to the LNG spot price of $60/mmbtu.