City gas creaks under costly purchases
PremiumA potential further spike in domestic gas price in FY23 remains a key overhang in the near future
The impact of higher gas prices was visible in the December quarter (Q3FY22) earnings of city gas distribution companies Indraprastha Gas Ltd (IGL) and Mahanagar Gas Ltd (MGL). Q3 margins came under pressure even as improving gas sales volume and price hikes offset the pain of higher gas cost to some extent.
Domestic gas prices rose by a sharp 62% effective 1 October as international gas prices increased. Further, considering that both companies depend on domestic gas supplies to meet their gas sourcing requirement, lower allocation of domestic gas during the quarter also hurt margins. As such, companies had to resort to gas sourcing from imported gas cargoes or spot gas, which is pricier than domestic gas.
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Notably, MGL’s results have been quite disappointing, with its Ebitda per standard cubic metre (scm) in Q3 at ₹3.4, significantly lower than ₹10.5/scm in Q2FY22. Nitin Tiwari, analyst at Yes Securities Ltd attributes MGL’s exceptionally weak margin performance to higher sourcing of spot gas. MGL’s volume growth was robust at 5.7% sequentially.
In its call, MGL’s management said another price hike undertaken in January should help. They said gas supplies from a fresh term contract commenced in December and APM (administered price mechanism) gas allocation is expected to happen soon. Overall, these factors should help reduce weighted average cost of gas.
On the other hand, IGL managed to beat analysts’ expectations in Q3. Its standalone Ebitda was down 11% sequentially to ₹470 crore. “This was 7-9% higher than JMFe/consensus, led by sharper-than-expected jump in volume and lower-than-expected fall in margin," said analysts from JM Financial Institutional Securities Ltd in a report on 8 February. IGL’s Ebitda per scm of gas declined to ₹6.7 versus ₹8 in Q2. IGL’s sales volumes grew 5.8% sequentially in Q3.
Even so, the path ahead is rocky. A potential further spike in domestic gas price in FY23 remains a key overhang in the near future. JM’s analysts have reduced their FY22-24 Ebitda estimates for IGL by 6-7% and for MGL by 8-19% to factor in the likely risk to margins due to sustained high global gas prices.
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In the last one year, shares of both companies declined by 30% each and they also saw a new 52-day low on Wednesday on NSE. Lower domestic gas allocation and faster adoption of electric vehicles pose challenges ahead. Softening gas prices in future is likely to act as a trigger for these stocks.
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