The recent reduction of over 20% in the allocation of Administrative Price Mechanisms (APM) gas to city gas distribution companies by GAIL India is expected to result in an increase in the prices of CNG (Compressed Natural Gas), as per analysts.
As communicated by Indraprastha Gas and Mahanagar Gas, the government has decided to cut APM gas allocation sharply from October 16, by around 21% for IGL and 20% for MGL from the current levels of 72%. While there has already been a sustained reduction in the extent of APM allocation (from over 85% at the beginning of FY24 to over 72% now), this reduction is the biggest one, ICICI Securities said.
The reduction is likely to impact the profitability of the CGD companies. The upcoming elections in Maharashtra are seen further limiting their ability to pass on cost increases to consumers at once.
“This is being done to account for gas requirements of newer CGDs, lower gas production from older fields and to divert gas to the OPaL Petchem plant of ONGC. While volumes under the priority segment have been reducing steadily over the last 12–18 months, the extent of reduction at one go is a negative surprise,” ICICI Securities said.
The brokerage highlighted that the extent of the hit is material, and suggests a Rs 3.2-4.4 per standard cubic meter (scm) or Rs 4.4-6.2 per kg price hike needed in CNG segments to sustain CGD companies’ margins.
In terms of volumes, ICICI Securities expects that priority sector allocation for Indraprastha Gas may potentially reduce to 4.5 mmscmd, and that for Mahanagar Gas to 2.0 mmscmd for FY26. For Gujarat Gas, it may reduce to 2.3 mmscmd.
“Our assessment of margins implies that in order to sustain margins at our current base case estimates, prices for domestic and CNG will need to increase by Rs 1.6-4.4 per scm, which seems challenging in the near term given the upcoming elections in Maharashtra/Delhi and the absolute quantum of the price hike,” it said.
As per ICRA, the reduction in APM allocation will have to be replaced by more expensive High Pressure High Temperature (HPHT) gas or LNG which will push the overall gas costs for the sector.
“In order to maintain contribution margins at existing levels, CNG prices would have to be increased by about Rs 5-5.5 per kg. The expected price rise may result in slower growth in the CNG vehicle registrations, which have been the key driver of CNG sales volume for the sector,” said Girish Kadam, senior vice president, Corporate Ratings, ICRA.
IGL and MGL on Thursday said that GAIL (India), the nodal agency for domestic gas allocation, has reduced domestic gas allocation to the companies effective from October 16, 2024. The revised domestic gas allocation to the companies is approximately 21% lesser than previous allocation which will have an adverse impact on profitability of the two companies. IGL and MGL are in discussion with key stakeholders to minimize the impact, the companies said in their respective exchange filings.
MGL also said that it is exploring options of sourcing gas through domestically produced High Pressure High Temperature (HPHT) gas, new well/well intervention gas (NWG) from ONGC and benchmark-linked long-term gas contracts, so as to continue to provide gas to its customers with price stability and bridge this shortfall.
As per guidelines by the oil ministry, domestically produced APM natural gas is to be allocated to city gas distribution companies for priority segments, specifically domestic PNG and CNG (transport). The policy states that the supply of domestic gas to CGD entities will be made only up to the quantity available and allocated to GAIL (India) limited for these segments.
“We assume blended non-APM gas prices at $13–16 per MMBtu for the year and given the trends right now, there could be a downside to these prices. “As such, this can help offset the hit from the domestic gas deallocation.” ICICI Securities said. “One more aspect is the differential with petrol/diesel prices, which are prevailing at 35–48% currently. This is also a comfort factor for the CGDs to increase prices to the extent required to offset the hit to gas costs.”
From: financialexpress
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