Domestic Gas prices have been hiked by 40% and the Gas Ceiling prices which come from the difficult field have also increased by 27% by the Government. So let’s discuss what is the impact of these increased gas prices on the customer and the retail investors in this article as we move ahead.
Operational Segments of Gas Companies:
The operational segments of the gas companies can be divided into 3 parts:
1) City-Gas Distribution which includes Compressed Natural Gas (CNG) for vehicles and Piped Natural Gas (PNG) for Residential Consumption. Companies under this segment are Adani Total Gas, Indraprastha Gas Limited, and Mahanagar Gas Limited.
2) Power Sector: Used by gas-fired power plants for a generation. Under this natural gas is used to generate electricity, unlike those power companies which use coal to generate electricity.
3) Industrial Sector: Natural Gas has usage in Ceramic, Petrochemical, Fertilizers, Gas, Sponge Iron, and other industries as a source of power.Indian Natural Gas Consumption Trend:
- The domestic natural gas pricing has been raised to $8.57 per MMBtu, up from $6.1 before. This refers to natural gas taken from oilfields, which account for over two-thirds of the natural gas generated in India.
- Meanwhile, the price of deepwater, ultra-deepwater, and high-pressure-high-temperature natural gas has been hiked from $9.92 per MMBtu to $12.6 per mmBtu.
- Fertilizer Industry is one of the core industries which uses Natural Gas primarily used as a source of power.
- The priority sector (which directly impacts the consumer, and is hence needed price control ) gets APM gas allocations.
- The priority sector includes City Gas Distribution, Fertilizers, Power, and Refineries/petrochemicals.
- The reasons for including this sector under priority is because of the following:
o City Gas: Increased prices in City Gas will lead to a shift of consumption towards petrol/diesel vehicles.
o Fertilizer, Power, and Refineries: It will impact the Consumer Price Index (CPI) inflation.
Impact of Inflation:
- The Non-priority sectors include chemicals, sponge iron, etc.
- The government has been formulating policies about the allocation and pricing of natural gas from time to time.
- The allocation of gas produced has been done by MoPNG/GLC considering various aspects like sectoral gas usage, which is linked to priorities of the Government from time to time.
- Central Government aims to invest 60 bn USD in the gas sector over the next 4 years – including laying gas pipelines & LNG terminals. India to expand the gas grid to 34,500 km.
- The Centre’s annual fertilizer subsidy bill is expected to rise as a result of the large increase in domestic gas prices announced by the government over the weekend. While the cost of producing fertilizers, power, ceramic tiles, etc. will go up, select upstream companies, analysts said, will reap the benefits of the move.
- The City Gas Distribution (CGD( segment includes compressed natural gas (CNG) and piped natural gas (PNG), which may see a price hike. PNG prices increased by more than 70% during the last year.
- According to some brokers, every $1 increase in gas prices is likely to boost ONGC and Oil India's standalone EBITDA by 4% and 7%, respectively.
- Aside from the dramatic increase in APM gas prices over the last year, there has been a shortage of APM gas availability. As a result, CGDs have been compelled to supplement with costly liquefied natural gas (LNG). Including the impact of the shortage and the lower currency, CGDs' gas costs have risen 5.6 - 6.6x in the last year.
- Impact of Inflation on City Gas Distributors:
- Higher input costs and the inability to pass it on will hamper the Margins significantly.
- In case, the CGD companies increase the prices proportionately of CNG and PNG, the price-sensitive demand will shift to traditional fuels resulting in lower volumes.
- Historically, the government has used different tools to directly or indirectly control such surge pricing to handle inflation.
o For each $/MMBtu gas price rise, CGDs need to raise CNG price by Rs 4.7-4.9/kg.
o For a $2.5/MMBtu price rise, and also for recent currency weakness, CGDs will need an immediate CNG price increase of Rs 12-14/kg (15-19%).
o Specifically, IGL and MGL will have to hike compressed natural gas (CNG) prices by around Rs 8/kg and Rs 9/kg said analysts at Jeffries.
o This, they said, would reduce CNG’s discount to gasoline/diesel from around 45%/30% to nearly 40%/20% for IGL.Industrial Impact:
What Should Investors Do?
- The increasing gas prices have a direct or indirect impact on industrial services like ceramic, sponge iron, etc.
- Due to inflationary pricing, there is a decreasing industrial demand.
- The trend of City Gas Distribution companies (Volumes [in MMSCMD]) supplying gas to industries:
- The quarterly growth rate of the companies is lower or negative which implies the increasing gas prices are reducing demand and further impacting the profitability of the company.
- The trend of Distributing Companies (Volumes [in MMSCMD]) supplying gas to industries:
- The QoQ growth rate of GSPL which significantly supplies industries like power, and fertilizer has also reported degrowth to mid-single digit growth in the volumes due to inflationary pressure of the gas.
As a customer of gas, the customer may need to suffer due to increased prices. But as an investor, one needs to closely track these gas companies as their margins are currently being impacted and hence investors need to closely watch all the developments in the sector. Do follow due diligence before making any investment decisions.