Gujarat Gas, Mahanagar Gas & IGL surge up to 4% – here is why; ICICI Securities recommend this

Shares of city gas distributor companies (CGD) – Gujarat Gas Limited, Mahanagar Gas Limited (MGL) and Indraprastha Gas Limited (IGL) – are in focus on Wednesday, November 30, as they surged up to 4 per cent on the BSE intraday on the back of natural gas price revision.

A government-appointed gas price review panel, led by Kirit Parikh, has recommended 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, according to a news agency PTI report.

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

Individually, shares of Indraprastha Gas gained by over 4 per cent to Rs 452 per share, followed by Mahanagar Gas up nearly 3 per cent to Rs 922 per share and Gujarat Gas up 2 per cent to Rs 508 per share on the exchanges intraday.

The gas price revision shall be negative for upstream companies such as ONGC and Oil India. However, it will be positive for downstream companies such as Gujarat Gas, IGL and MGL, Payal Shah Research Analyst at ICICI Securities said in a report while explaining it with factors.

“If prices get revised to US$6.5 per mmbtu, the gas sourcing costs for CGDs would decline by US $2 per mmbtu. This would improve their margins and would also likely lower the CNG and domestic PNG sales price,” the analyst at ICICI Securities said.

Similarly, Shah in a report further said, “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.”

The brokerage has a Hold rating on Gujarat Gas, IGL and MGL with a target price of Rs 550, Rs 430 and Rs 1000 per share, respectively.