Kirit Parikh does a balancing act: IIFL Capital Services

1 Dec 2022 , 01:29 PM

Key recommendations include:

• Lowering of APM gas price to US$6.5/mmbtu (94-95% ONGC/OIL production) from current US$8.57/mmbtu.
• No pricing changes for complex fields (RIL), and inclusion of Gas under GST.

Kirit Parekh does a balancing act

The KP committee has proposed:

• Complete pricing + marketing freedom for APM/ non-APM gas from CY27/26 respectively.
• Until then, the gas will be sold through formula linked to oil with a floor, cap (US$4-6.5/mmbtu), and annual adjustment factor.
• No changes are proposed to HPHT gas (RIL, and new fields of ONGC).
• Inclusion of gas under GST.
• Lower excise duty on auto fuels.

The report seems to be balanced and has taken into account interests of consumers and E&P players.

CGDs will get gas priority

The report, if accepted, will lower input costs for CGDs, IPPs and fertilizers (US$8.57/mmbtu now) by 24%. Details are yet unclear on how CGDs will continue to get uninterrupted APM gas at a time when the overall pool is declining and consumption rising. It appears that IPPs and fertilizers may see some cut.

Regardless, in near term, all consumers – including CGDs – will enjoy lower input costs. Meanwhile, CNG sales growth may resume as analysts at IIFL Capital Services expect CNG prices to lower (US$1/mmbtu lower price = ~4% cut in end price). ONGC/ OIL will get lower realizations for APM gas (94-95% of their gas production).

Prefer CGDs over upstream

CGDs are well placed to register double-digit volume growth over next few years, but remain mindful of their capital allocation. For example – CNG-heavy companies like IGL and MGL have almost 40-50% of their respective net worth in cash, as their pre-capex OCF is greater than their annual capex; marked improvement in capital allocation is essential. On this backdrop, GGAS stands out well (top pick). Upstream companies trade 3x-3.4x FY24 estimated EPS, on US$70/bbl oil, and even after potential 10-14% EPS downgrade for lower gas prices, the multiples are cheap. Acceleration in volume growth holds key for their sustainable re-rating.