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City Gas Distributors' Margins In Focus Amid CNG Price Cuts

Minister Hardeep Singh Puri has criticised the CGD firms for not passing on the cost benefits of gas-sector reforms to consumers.

<div class="paragraphs"><p>Mahanagar Gas Ltd. outlet in Mumbai (Source: Sagar Salvi/NDTV Profit)</p></div>
Mahanagar Gas Ltd. outlet in Mumbai (Source: Sagar Salvi/NDTV Profit)

City-gas distribution companies have been under pressure after the minister of petroleum and natural gas said recently that the Union government is willing to take measures to ensure that the full benefit of reforms is passed on to the end-consumers.

Hardeep Singh Puri's comments and the Petroleum and Natural Gas Regulatory Board's announcement in February of the formation of an expert committee to assess the current framework of the sector turned brokerages cautious on the companies' margins.

Shares of all the major CGD companies dropped on Wednesday, with Mahanagar Gas Ltd. plunging as much as 17% and Indraprastha Gas Ltd. falling over 7% during the day.

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At an industry event, Puri criticised the city-gas distributors for not passing on the cost benefits of gas-sector reforms to consumers. He emphasised the disparity by pointing out the distributors' recent profits. The minister asserted the government's readiness to take significant actions to guarantee affordable gas prices for consumers.

Citi Research said prospective government actions might affect the exclusivity and margins of gas distribution firms, particularly MGL for its premium per-unit Ebitda of Rs 13.

Price Cuts

Recent price reductions by CGD companies have heightened caution. GAIL (India) and Adani Total Gas Ltd. lowered the prices of compressed natural gas by Rs 1–1.5 per kg in Bengaluru and Ahmedabad over the past month.

MGL reduced the CNG prices in Mumbai by Rs 2.5 per kg on Tuesday, citing decreased gas-sourcing costs and a push to increase volumes. Indraprastha Gas also announced a Rs 2.5-per-kg reduction in CNG prices across almost all its areas on Wednesday.

Emkay Global Financial Services Ltd. suggested that these actions indicate the government, either directly or indirectly, intervened to lower prices.

An Overreaction?

In a note on Thursday, Motilal Oswal Financial Services Ltd. said the stock-price correction a day ago was partly an overreaction and partly driven by profit-booking due to the strong run in the last six months. The brokerage said the government focuses on volume growth rather than regulating prices.

Emkay highlighted that while ministerial statements are made, there are no structural changes and expects CGD pricing freedom to endure and stay linked to market forces.

While the narrative does appear negative, Emkay said this could only sustain for the pre-election cycle, beyond which the outlook remains stable.

Are CGD Companies 'Margins At Risk?

Citi has downgraded MGL to a 'sell' rating, cutting its target price by 5% to Rs 1,405 apiece. It cited concerns over potential government actions impacting exclusivity and margins, pointing out to the company's susceptibility due to a premium Ebitda per standard cubic metre of gas.

Emkay said the CNG price cut of Rs 2.5 per kg would affect MGL and Indraprastha Gas' Ebitda/scm by Rs 1.5. It expects the broader gas prices to offset the impact on MGL's margins.

However, Emkay reduced its Ebitda/scm estimate for Indraprastha Gas and downgraded its rating to 'reduce'.

Motilal Oswal countered Citi's perspective, indicating that MGL faces minimal margin risk and can even benefit from lower-spot LNG prices in the fourth quarter.

Nuvama Wealth and Investment Ltd. estimated that 51% of MGL's price cut stems from a 38% sequential decline in input-spot LNG prices. Following the reduction, MGL's CNG becomes more competitive against petrol or diesel, potentially driving up volumes.

MGL's Exclusivity At Stake?

The PNGRB has said MGL's monopoly ended in Mumbai on April 11, 2021. However, regulations allow extending this exclusivity for 10 years and there are examples of this happening in other areas.

Even if competitors do enter the market, a court case needs to be resolved before they can freely market gas. Regulations itself restrict competition by not allowing them to set up pumps at stations already equipped by MGL.

Brokerages pointed out that this leaves around 20–30% of gas outlets open for competition and these are likely to be low-volume stations.

Due to the company's pipeline network, the distributor will earn a return on investment of around 12% for gas sold by competitors, according to Nuvama.

Therefore, the entry barrier is considerable and the effect on volumes is relatively minimal.

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