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Event update: Oil & Gas; Domestic gas costs hiked 10% - IGL first off the gate as usual

EVENT – Domestic gas prices hiked, IGL passes on the impact promptly

The 6 monthly revision in domestic gas prices as per the set formula has delivered a gross price of US$3.36/mmbtu (Gross Calorific Value or GCV), which translates into a price of US$3.77/mmbtu (Net Calorific Value or NCV) for consumers with effect from Oct 1 2018. Gas prices have increased by 10% from previous levels of US$3.06 (GCV) and US$3.4/mmbtu (NCV). Accordingly, Indraprastha Gas Ltd (IGL) has revised its compressed natural gas (CNG) and domestic piped natural gas (PNG) prices by ~4% for CNG and 4.6% for PNG in Delhi and other NCR (Rs1.6-1.95/kg for CNG, Rs1.3-1.4/scm for domestic PNG) with effect from 1 Oct 2018, with the other two companies (Mahanagar Gas or MGL/Gujarat Gas or GGL) in our coverage universe likely to follow suit. IGL had already passed on the impact of rupee depreciation via a price hike of Rs0.6/kg in CNG and Rs1.1/scm in domestic PNG on 1 Sep 2018.

IMPACT – Earnings boost for ONGC/OIL; Neutral impact for CGDs

Earnings boost in ONGC/OIL already in estimates: ONGC’s gas realisations continue to improve with consistent increase in domestic gas prices. From a trajectory of sustained softness in prices from Oct 2014 (when the new pricing formula was introduced) until Sep 2017 (when prices dropped to US$2.8/mmbtu on NCV basis from US$5.6/mmbtu in Oct 2014), prices have now risen by US$1/mmbtu over last 3 revisions. Every US$0.5/mmbtu revision in absolute prices raises ONGC’s earnings by 4%, while for OIL, the impact is 6%. As a result, the gradual improvement in gas prices is a material positive for the two companies. As we have been broadly factoring in 7-8% increase in our FY19E average gas realisation estimate, the recent revision in gas prices does not have any impact on our numbers.

IGL remains the most proactive in passing on costs: IGL has always shown alacrity in passing on the impact of any increase in costs in prices, and the last month has been no different. The company increased prices on 1 Sep 2018 to pass on the impact of weaker INR versus USD and therefore, the extent of price hike this time around would be reduced to that extent. We note that average prices for CNG/domestic PNG have risen 18/19% over May 2017-Oct 2018, but we are yet to see any appreciable negative impact on volume growth for IGL, highlighting the improved competitiveness of gas versus alternate fuels.

MGL/GGL will need to pass on the price hikes: Both MGL and GGL are yet to pass on the impact of the weaker rupee to customers (except for industrial customers of GGL where INR change is a pass through). For the two companies to maintain gross margins at current levels, we believe price hikes will need to be in the region of Rs2.3/kg for CNG and Rs1.5/scm for domestic PNG. For GGL, an additional price hike of Rs1.5/scm is also likely for the industrial/commercial segment to pass on the higher LNG prices over the last few months.

The clear competitive advantage that gas has versus alternate fuels provides comfort on pricing power of city gas distribution CGD companies. We believe the higher domestic gas cost does not pose any risk to our margin assumptions. We maintain our gross margins estimates of Rs11/11.8/7.2 per scm for IGL/MGL/GGL, in FY19E respectively.