The central government’s decision to increase the national administered pricing mechanism (APM) gas price will negate the benefit of higher APM gas allocation for compressed natural gas (CNG) players, Jefferies said in a report.
In a report, Jefferies said that CNG players have limited room to raise prices given the worsening economy.
According to the report, GAIL, Indraprastha Gas and Mahanagar Gas are the main losers, Reliance Industries Ltd could be a marginal beneficiary.
An allocation of high-pressure, high-temperature (HPHT) gas from Reliance Industries’ KG field by the end of 2022 and a new pricing formula from a government-appointed committee could provide some respite.
APM gas price has been revised from $6.26/mmbtu (cash) to $8.57/mmbtu, while HPHT gas price has been revised from $9.9/mmbtu to $12.5/mmbtu .
The government-appointed committee under the leadership of Kirit Parikh has been asked to present its recommendation on the price of domestic gas in mid-October.
Jefferoes said that Indraprastha Gas needs to increase the price of CNG by about Rs 8/kg and Mahanagar Gas by Rs 9/kg to pass on the impact of rising raw material cost.
This would reduce the CNG to gasoline/diesel discount from around 45/30 per cent to around 40/20 per cent for Indraprastha and Mahanagar.
This could affect volume growth. For Gujarat Gas, the impact will be relatively small as the priority sector makes up only about 25 percent of the total volume, Jefferies said.
The increase in APM gas costs roughly offsets the benefit of a higher allocation (94 percent from 85 percent previously) announced in August for city gas distributors (CGDs). GAIL’s raw material cost for the LPG business rises even as LPG prices are falling, further hurting profitability.
“Continued availability of 94 percent of the APM group’s CNG requirement by diverting volumes from other segments, access to RIL’s KG basin gas through the bidding process and pricing strategy will determine the trajectory of the volume. We believe increasing volume through incremental supplies at spot prices is dilutive earnings,” Jefferies said.
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