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CGDs: CNG segment faces the steepest uphill battle ever

Domestic gas prices to rise by ~USD1/mmBtu

* Since the start of the current domestic APM pricing regime in Nov’15, domestic gas prices have risen only four times, the maximum being INR1.6/kg.

* If we rebase to 1QFY16, the retail CNG price (in Delhi) has risen by a meager 13%, while domestic APM gas price has fallen by 56%, resulting in EBITDA/scm rising to INR8 in 4QFY21 from INR5.6 in 1QFY16 for IGL.

* MAHGL has been more aggressive, doubling its EBITDA/scm to INR12 over the same period. GUJGA has different dynamics at play due to its least exposure to CNG.

* In this report, we highlight that IGL and MAHGL face the steepest uphill battle so far, when domestic gas prices are expected to rise by ~60%, or INR4/kg, excluding taxes.

* Demand from Oil Marketing Companies (OMCs) to hike commissions aggravates the trouble. We maintain our Neutral/Buy rating on IGL/MAHGL.

Expect ~60% rise in domestic APM price from Oct’21, the highest ever; another one around the corner in Apr’22

* Domestic gas prices are linked to four international hubs: Henry Hub, Alberta, NBP, and Russia.

* HH gas price has risen to USD2.7/mmBtu for the next pricing cycle from USD2/mmBtu in the existing pricing cycle. Alberta prices have also moved to USD2.2/mmBtu from USD1.7/mmBtu.

* As a result of this, we expect domestic APM gas prices to be raised to USD3.1/mmBtu from USD2/mmBtu (NCV), the highest ever increase. If the current trend in gas prices remains, we may see another hike in Apr’22.

IGL and MAHGL brace for a threat to EBITDA/scm

* After starting from USD5.6/mmBtu in Nov’15, domestic gas prices fell to USD2.7/mmBtu by Apr’17, before making a comeback to USD4.1/mmBtu in Apr’19. Since then, prices have declined to USD1.8/mmBtu (GCV) at present.

* In INR terms, domestic gas prices have declined to INR7.6/kg in 4QFY21 from INR17.2/kg in 1QFY16, while CNG prices (at Delhi) have risen to INR43.4/kg from an average of INR37.9/kg.

* As a result, IGL raised its EBITDA/scm by 44% to INR8/scm, while MAHGL doubled it to INR12.1 during the same period.

* Our estimate suggests that for every USD1/mmBtu increase in domestic APM gas price, IGL and MAHGL need to take an INR4/kg hike in CNG, excluding taxes. Combined this with the persistent demand of OMCs to raise commissions, both IGL and MAHGL appear staring at the steepest uphill battle so far. Domestic gas prices may rise even further in Apr’22, which would spell further trouble for these companies.

Valuation and recommendation

IGL (Neutral with a TP of INR490/share)​​​​​​​

* We build in an EBITDA/scm of INR7/INR6.5 for FY22E/FY23E v/s INR7.6 for FY21. The stock is trading at 31x/27x FY23E standalone/consolidated P/E (IGL trades at a 57% premium to its one-year forward P/E long term average).

* As highlighted above, the company faces headwinds in addition to the continued uncertainty on lockdown-related CNG sales. Since 1QFY16-4QFY20, the company’s EBITDA/scm has remained in a tight range of INR4.8-6.6. However, a rapid decline in domestic APM gas price to USD2/mmBtu from USD3.6/mmBtu in Apr’19, resulted in the company retaining the benefit partially and expanding its EBITDA/scm.

* Volume growth opportunity exists in current as well as new areas. However, we expect a decline in the same going forward. We value the company at 24x FY23E EPS to arrive at our TP of INR490. We reiterate our Neutral rating.

MAHGL (Buy with a TP of INR1,310/share)

* We build in EBITDA/scm of INR10 each for FY22E/FY23E v/s INR11.6 for FY21. The stock is trading at 14x FY23E P/E (MAHGL trades at par with its one-year forward P/E long term average). As highlighted above, it faces headwinds in addition to continued uncertainty on lockdown-related CNG sales.

* Decline in the domestic APM gas price resulted in the company retaining the benefit partially and expanding its EBITDA/scm. However, we expect a decline in the same going forward.

* The company faces a lack of long term volume growth opportunities. We value MAHGL at 16x FY23E EPS to arrive at our TP of INR1,310 and maintain our Buy rating (owing to its cheap valuation, with ~3% dividend yield – the highest among its peers).

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