Shares of city gas distribution (CDG) companies like IGL, MGL, Gujarat Gas have been under pressure over the past few sessions. We try to answer some of the questions being asked about the trend.
Why are the stocks of city gas distribution companies declining?
The abovementioned companies saw a sharp margin decline for the December quarter due to a jump in prices of high liquefied natural gas (LNG). CGDs have not been able to get the entire requirement of priority CNG/domestic piped gas at government-administered prices. To make up for the shortfall, CGDs have been forced to make up with expensive spot LNG which is the raw material for them. Average Spot LNG prices persisted at >$29/MMBtu for Q3.
Was a margin decline expected in Q3?
Yes, there was an expectation of a margin decline but the decline has been much worse for MGL and Gujarat Gas whereas IGL has reported margins better than estimates.
| Margins | Q3FY22 | POLL |
| IGL | 21.1% | 19.4% |
| MGL | 10% | 25.2% |
| Guj Gas | 4.6% | 7.1% |
Did the companies hike prices to pass on higher raw material prices?
During Q3, Gujarat Gas raised gas prices for industrial customers by Rs 20.5/scm (55 percent), CNG by Rs 13/kg (24 percent), and domestic piped gas prices by Rs 5.7/scm (24 percent). IGL too took a price hike of Rs7.85/kg during the quarter and from end-September, MGL has raised CNG prices by Rs 11.5/kg (22 percent) and domestic PNG prices by Rs 7.6/scm (25 percent). However, the prices have been hiked with a lag, and impact near-term margins.
The stocks of CGD companies have not done so well in the last year, how do valuations stack up?
Gujarat Gas is the most expensive stock in the listed CGD space at 23.3X estimated FY23 earnings, this is followed by IGL at 15.1X, MGL that reported record low margins this quarter has valuation support and is trading at 8.3X.
How should investors approach these stocks?
Brokerages believe the worst of higher gas prices is over for these companies and margins will see an uptick from hereon. MGL at 8.1X provides valuation comfort, however, margin recovery will be the key to watch. Also, APM gas pricing is expected to increase prices further from April, so companies will need to take more price hikes from these levels. Additionally, OMCs have also asked for increased commissions for the usage of pumps and there is a big push for EVs as well. Investors should track these developments before taking a call.
Also Read: Vedanta says won't rejig corporate structure, shares gain 2%; CLSA maintains 'outperform'
(Edited by : Jomy Jos Pullokaran)
First Published: Feb 9, 2022 4:43 PM IST
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