IIFL picks IGL over MGL and expects the current gas price in spot market to go up

Gas prices are expected to be revised from April 1. The gas panel report's key recommendation is for prices of natural gas to be between $4-6.50 per MMBtu. Speaking to CNBC-TV18, Harshvardhan Dole, Vice President of Instl Equities at IIFL  expressed optimism about the prospects of Indraprastha Gas Ltd (IGL) and Mahanagar Gas Ltd (MGL). He expects these companies to do well, and he prefers IGL over MGL.

“CNG prices had gone up anywhere between 36 and 40 percent across the country and to that extent, any breather or any correction in the raw material prices will mean these companies pass on the benefit to end consumers to a great extent. So the attractiveness of CNG to the alternative fuel improves, and that should benefit these companies quite materially. So logically IGL and MGL should do well and between these we definitely like IGL,” he said.

Dole pointed out that the current gas prices in the spot market are higher than usual and not sustainable. This is a concern for the industry, as it suggests that prices may be in for a correction in the near future.

“Firstly, the current gas prices which are there in the spot market are significantly higher, and these are not sustainable. So even if these gas prices get reset to a lower price of say, $6-6.50 per MMBtu, it will actually bring in some correction in the earnings. But it will also bring instability over the medium to long term,” he said.

City gas distribution cos are the largest producers of gas in the country. Dole mentioned that CGDs are the largest asset class that is consuming gas in a meaningful way and are projected to drive the overall consumption of gas.

“Therefore this relatively lower or benign price environment ends up benefiting them the most,” he added.

Also speaking to CNBC-TV18, Vikash Kumar Jain, investment analyst at CLSA stated that the floor price of $4/MMbtu would bring in some stability for gas producers.

“If you were to look at the gas price, the floor price, which has been approved by the formula that is $4 per MMBtu across the life of upstream companies, will be a kind of a win-win formula, where of course the gas consumers are the obvious beneficiaries, but even the upstream companies actually benefit out of it.”

Jain believes that if the Kirit Parikh Committee recommendations are not adopted, it would be odd. If adopted, Kirit Parikh Committee recommendations will be a positive development for both gas producers and consumers.