Natural gas price increase negative for GAIL, IGL, marginal beneficiary is RIL: Jefferies

The central government's decision to increase the domestic administered pricing mechanism (APM) gas price will negate the benefit of increased APM gas allocation to compressed natural gas (CNG) players, Jefferies said in a report.

In a report, Jefferies said the CNG players have limited room to increase the prices given worsening economics.

According to the report, GAIL, Indraprastha Gas and Mahanagar Gas are the key losers, Reliance Industries Ltd could be a marginal beneficiary.

The allocation of high pressure and high temperature (HPHT) gas from Reliance Industries' KG Field by end of 2022 and new pricing formula from a government appointed committee could provide some respite.

The APM gas price has been revised from $6.26/mmbtu (effective) to $8.57/mmbtu while HPHT gas price has been revised from $9.9/mmbtu to $12.5/mmbtu.

The government-appointed committee under Kirit Parikh has been asked to submit its recommendation on domestic gas pricing by mid-October.

Jefferoes said Indraprastha Gas needs to raise CNG price by about Rs 8/kg and Mahanagar Gas by Rs 9/kg to pass on the impact of the rise in feedstock cost.

This would reduce CNG's discount to gasoline/diesel from about 45/3 0 per cent to about 40/20 per cent for Indraprastha and Mahanagar.

This could impact volume growth. For Gujarat Gas, the impact will be relatively small as the priority sector constitutes only about 25 per cent of overall volume, Jefferies said.

The rise in APM gas cost roughly offsets the benefit of higher allocation (94 per cent from 85 percent earlier) announced in August for the city gas distributors (CGD). GAIL's feedstock cost for LPG business increases even as LPG prices are falling further hurting profitability.

"Continued availability of 94 per cent of CNG requirement from APM pool by diverting volumes from other segments, access to RIL's KG basin gas via the bidding process and pricing strategy will determine volume trajectory. We reckon growing volume via incremental supplies at Spot prices is earnings dilutive," Jefferies said.