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Inflection point for CGD sector..

As per media sources, the Kirit Parikh committee is likely to suggest a ceiling price of US$6.5-7/mmbtu for domestic gas. This ceiling may be increased by US$ 0.5/mmbtu every year and could eventually be market linked by the end of the 4th year. Media reports also state that the committee recommends bringing natural gas under GST. If implemented, this move would be positive for downstream companies such as IGL, MGL and Gujarat Gas., and marginally negative for ONGC (neutral for RIL). We expect lower sourcing costs (|6-8 per scm) to benefit the CGDs on the margin front to an extent and rest be passed onto to customers (raising lucrativeness of CNG, PNG over alternate fuels). Thereby, we expect 10% increase in FY24E EPS for IGL, an 18% increase in FY24E EPS for MGL and 8% increase in FY24E EPS for Gujarat Gas. For HTHP fields, we expect an element of pricing freedom to encourage continued investments in that field.

CGDs to be benefitted from gas price revision

* Current domestic gas price for the old fields stand at US$8.57/mmbtu (GCV), which were revised from US$6.1/mmbtu on October 1. This led to an increase in gas sourcing cost of IGL, MGL and Gujarat Gas and impacted their margins. Although these companies have taken price hikes, they aren’t sufficient to pass on the increase in gas costs.

* If prices get revised to US$6.5/mmbtu, the gas sourcing costs for CGDs would decline by US$2/mmbtu. This would improve their margins and would also likely lower the CNG and domestic PNG sales price.

* Gas from the old fields is sold to CGDs for the priority sector (CNG and domestic PNG) needs. Priority sector contributes around 80% and 86% to the volume mix of IGL and MGL, respectively. For Gujarat Gas, this is around 35%. Hence, IGL and MGL are likely to be benefitted to a greater extent than Gujarat Gas if the price revision goes ahead as planned

Valuation and Outlook

Currently, our target price for IGL is |430/share (standalone at |397 i.e 19x P/E on FY24E EPS and investments at |33) with a HOLD rating. For MGL we have a HOLD rating with a target price of |1000/share i.e ~12.5x P/E on FY24E EPS. For Gujarat Gas we have a HOLD rating with a target price of |550/share i.e 19.8x P/E on FY24E EPS.

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