The recent hike in domestic gas allocation for CNG has created room for Indraprastha Gas Limited (IGL)/Mahanagar Gas Limited (MGL) to defend their respective Ebitda per scm till $70/60 per mmbtu Spot price (assuming APM price is capped at current level). Gujarat Gas (GUJGA) could surprise positively if it receives its contracted spot volumes in H2FY23. However, we see earnings downside risk of 7-22% if GUJGA fails to procure the contracted Spot vol @ $30.
Govt allocates higher share of domestic gas for CNG: The oil and gas ministry has allocated higher volume of domestic gas to the CGD priority sector (domestic PNG + CNG) by diverting gas earmarked for industries. As a result, the overall allocation of domestic gas has been increased to 20.8 mmscmd, sufficient to meet ~94% of CNG demand (up from ~85%). The gas cost has fallen ~40% from $10.5/ mmbtu to $6.26/mmbtu. IGL and MGL would be key beneficiaries with the priority sector contributing ~70% of their respective volumes.
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Spot LNG markets in a storm: While the higher allocation of domestic gas is a positive, rising LNG prices could lead to a supply shortfall in H2FY23E as Indian buyers could get priced out of the spot markets. Spot LNG prices have spiked to record levels (>$70/mmbtu). A colder European winter could keep Spot price near the current level over H2FY23E.
GUJGA could be forced to curtail volumes: With ~70% volumes from I/C, we believe there is a risk GUJGA could be forced to curtail Morbi volume to ~3.6 mmscmd to protect margins if it falls short on the contracted Spot volumes till Feb-23. The contract is attractively priced at ~$30/mmbtu, but we see supply risks if Spot LNG prevails at the current level in H2FY23. While we see earnings upside risk of ~17% if GUJGA manages to procure Spot LNG @$30, this could reverse with earnings downside risk of ~15-20% if it has to procure Spot from the market.
IGL could defend margins till $70 Spot if APM gas price is capped: Assuming the domestic gas allocation continues at 94%, APM gas prices are capped and the retail price is kept unchanged, we see IGL’s Ebitda/scm protected till spot LNG price of $70/mmbtu.
MGL could defend margins till $60 Spot if APM price capped: Assuming the domestic gas allocation continues, APM gas prices are capped and no further price hikes, we see MGL maintaining its margins near historical averages till spot LNG price of $60/mmbtu.
