Gujarat Gas, Mahanagar Gas and IGL may see positive impact of gas price revision – know what analyst says I check target price

Gujarat Gas, Indraprastha Gas, Mahanagar Gas, ONGC, Oil India: The gas price revision move by Kirit Parikh-led committee would be positive for downstream companies such as Indraprastha Gas Limited (IGL), Mahanagar Gas Limited (MGL_ and Gujarat Gas, while marginally negative for Oil and Natural Gas Corporation (ONGC), ICICI Securities report stated.

“We expect lower sourcing costs to benefit the CGDs (city gas distributors) on the margin front to an extent and rest be passed onto to customers, raising lucrativeness of CNG, PNG over alternate fuels,” Harshal Mehta, Research Analyst, ICICI Securities said in a report.

Amid this, the analyst expects 10 per cent increase in FY24E EPS for IGL, an 18 per cent increase in FY24E EPS for MGL, and an 8 per cent increase in FY24E EPS for Gujarat Gas.

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Why CGDs to be benefitted from gas price revision

* Current domestic gas prices for the old fields stand at US$8.57/mmbtu, which were revised from US$6.1/mmbtu on October 1. This led to an increase in the gas sourcing cost of IGL, MGL, and Gujarat Gas and impacted their margins. Although these companies have taken price hikes, they aren’t sufficient to pass on the increase in gas costs.

* With gas price revision to US$6.5/mmbtu, the gas sourcing costs for CGDs would decline by US$2/mmbtu. This would improve their margins and would also likely lower the CNG and domestic PNG sales prices.

* Gas from the old fields is sold to CGDs for the priority sector needs. Priority sector contributes around 80 and 86 per cent to the volume mix of IGL and MGL, respectively. For Gujarat Gas, this is around 35%. Hence, IGL and MGL may be benefitted to a greater extent than Gujarat Gas.

Currently, the brokerage's target price for IGL is Rs 430 per share with a HOLD rating, and the same for MGL too – a HOLD rating with a target price of Rs 1000 per share. While for Gujarat Gas also has a HOLD rating with a target price of Rs 550 a share.

A government-appointed gas price review panel, led by Kirit Parikh, is recommending a floor and ceiling price for natural gas produced from legacy fields of state-owned firms for five years to help moderate CNG and piped cooking gas rates, a news agency PTI report said.

ONGC and Oil India Ltd will be paid a minimum or floor price of USD 4 per million British thermal unit and a cap or ceiling price of USD 6.5 as against the current rate of USD 8.57, three sources with direct knowledge of the matter said.