The Kirit Parikh Committee submitted its recommendations on domestic gas pricing to the government on Wednesday. The suggestions will be presented to the Ministry of Petroleum and Natural Gas for review.
Here's what brokerages made of these recommendations:
Emkay
Maintains 'buy' on Oil and Natural Gas Corporation Ltd, Oil India Ltd., Indraprastha Gas Ltd, and GAIL (India) Ltd.
If implemented, it would provide respite to city gas distributors, with potential cuts in retail sale prices and margins staying within the targeted range.
Emkay is constructive toward both city gas distributors and upstream players and sees limited downside risks to earnings. In fact, upstream can see upsides.
A move towards market-linked pricing is structurally positive for Upstream, and a floor of $4/MMBtu will support earnings in case of a downcycle.
CareEdge
The recommendations of the Kirit Parikh committee are a great balancing act to safeguard the interests of gas consumers, city gas distribution companies, and gas producers in difficult fields.
It will boost the use of natural gas and help contain high inflation.
Free pricing of domestic gas from difficult fields would attract sizeable investment from upstream companies, leading to higher domestic gas production in the long run.
Based on the recommendations, the price of domestic natural gas from legacy fields would be linked to crude oil prices, with an applicable floor of $4/MMBtu and a cap of $6.5/MMBtu. CareEdge Ratings expects the price of domestic gas would otherwise have been $10/mmbtu for FY24, according to the existing formula.
The revision in the pricing mechanism is likely to result in a lower realisation of at least $3.50/MMBtu for domestic gas production from legacy fields. Accordingly, domestic gas producers of legacy fields could have a lower realisation of natural gas to the extent of Rs 23,000 crore in FY24.
Kotak Institutional Equities
Prefers city gas distributors, with a 'Buy' on Indraprastha Gas and Mahanagar Gas Ltd. over ONGC, OIL, and GAIL—all 'Sell.'
The ceiling price provides only short-term relief to city gas distributors. The recommendation to remove the ceiling and link the APM price to the 10% oil slope from January 2027 is worrisome for the long term.
High prices can stall demand growth for the price-sensitive CGD sector. We assume all recommendations may not be accepted.
According to Kotak, at a price of $6.5/MMBtu, APM gas is unaffordable for price-sensitive segments such as power and CGDs.
Prabhudas Lilladher
To promote new investment, gas produced from new fields is to be given pricing and marketing freedom, which is positive for Reliance Industries—with a buy rating and a price target of Rs 2,892—and ONGC, with a buy rating and a price target of Rs 180.
Capping APM gas prices is encouraging for CGDs, as they account for around 90% of priority sector demand, i.e., CNG and PNG domestic.
Falling domestic gas and spot LNG prices are positive for Indraprastha Gas, with a buy rating and a price target of Rs 596; Mahanagar Gas, with a buy rating and a price target of Rs 1,103; followed by Gujarat Gas, with a hold rating and a price target of Rs 530. The brokerage has left estimates and ratings unchanged pending clarity, and Indraprastha Gas is their preferred pick.
Prabhudas Lilladher's FY24/25 gas price for ONGC and OIL India is $5/MMBtu, and they see limited risk to the pricing.
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