The city gas distribution space is abuzz, and not for the best reasons. The three companies, IGL, MGL and Gujarat Gas have cut prices. IGL and MGL for the CNG segment and Gujarat Gas for the industrial segment and all of them cited lower natural gas prices as the reason for this price cut.
But price cuts are the usual course of business, why did the stocks fall so much? This is because, at the same time, the oil minister in a press conference said that gas sector reforms have not reached the end consumers at a time when the government is focusing on affordable gas prices, and added that they are worried about high profits earned by these companies and the government is ready to take steps with respect to pricing and ensure compliance by the companies.
That is not it, the PNGRB also uploaded a document on Wednesday (March 6) that indicated that MGL’s exclusivity in the Mumbai region ended in 2021, which means they will not have exclusive rights to this region when it comes to CNG sales.
Before we look at the impact, let's try and understand what kind of margins these companies are making.
In Q3, MGL made the highest EBITDA in the space at ₹13.3, followed by IGL at ₹7.2 and then Gujarat Gas at ₹4.8. Of course, MGL and IGL have the highest exposure to CNG space and these have a direct impact on retail consumers. In terms of profits, IGL profit margin for the last four years is 15-16% and for MGL it is at 19-20% in the last two years.
So, what got the Street worried? One, they are worried about the government’s intervention with respect to pricing in the CGD sector, which has been market-driven so far and second, the exclusivity issues for some of these companies which could end soon leading to more competition and fewer volumes. The fear is there would be a hit on both margin and volumes.
We spoke to the PNGRB, the regulator, and they indicated that they received no communication from the ministry regarding curbing CGD pricing and that there is no intention to intervene in regulating or getting into day-to-day activities, and that they are in favour of market freedom.
The normal profit level is 20% in CGD infrastructure and they are not saying CGDs are making super-normal profits. Ideally, a 12-15% profit margin is what seems reasonable and right now companies are making over 20% which they are worried about.
What next? First, the end of exclusivity for CGD companies is still subjudice and a final decision is awaited on this. This can extend by 10-plus years given precedents and could happen for MGL as well. Second, regulating profits for CGDs would mean lower capex in the sector and this would conflict with the government’s goal of expanding the gas economy and infrastructure.
What are brokerages making of this?
Emkay, for instance, says such ministerial statements closer to elections are expected given that petrol and diesel price cuts are also long-awaited. However, pricing freedom should endure and stay linked to market forces and nothing has structurally changed.
Nuvama says that more than half the price cut by MGL is led by easing spot prices and hence CNG is still 50/35% more competitive than petrol/diesel and hence volume boost is likely. The PNGRB stated that MGL’s Mumbai monopoly ended in April 2021 but nothing can move forward till pending court cases are resolved.
ICICI Sec says that, technically, the PNGRB Act does not allow for regulation of end-consumer prices and the signal they are getting from pronouncements may indicate a further lowering of priority gas allocation to the CGDs and this could create margin pressure for CGDs but they are puzzled by the need articulated by the regulator to increase penetration and talk about lower profits at the same time.
And this is what the Street is worried about, regulatory pressure on these companies the way we have seen for OMCs as well.
(Edited by : Amrita)
First Published: Mar 7, 2024 11:18 AM IST
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