* While lockdowns have affected demand, the CGDs (City Gas Distribution companies) bear fruits in their kitty to partly compensate for the volume loss.
* While domestic Administrated Price Mechanism (APM) prices have declined for the Apr-Sep’20 period, the recent crash in oil and gas prices is likely to result in low gas prices for Oct’20-Mar’21 also. However, the CGDs have kept a portion of the gas price cut in Apr’20 (not passed it on), and thus, are likely to earn higher margins.
* As the lockdowns gradually open up, we believe demand for Industrial consumption would revive sooner v/s CNG and PNG-commercial. This would be on account of many people avoiding taxi services and restaurants/malls remaining shut for a longer time. Mumbai (MAHGL) and Delhi (IGL) are the prime ‘Red’ zones, and thus, we believe that revival in the core segment (CNG) for respective CGDs would be slower than expected.
* Despite being categorized as CGDs, the model of operation differs significantly among companies, i.e. the Industrially inclined – GUJGA (with >75% of PNG-Industrial volumes) and CNG inclined – IGL and MAHGL (with >75% of CNG volumes).
* Even after various initial attempts by the regulator, we are yet to see a notification on introduction of competition. The recent lockdowns might also result in further delay of the same. However, if notified, the incumbents might see some dilution of RoEs led by volume and margin compression.
* Although, the regulator is also trying to be a facilitator to the incumbent companies along with maintaining the interest of consumers. Thus, the stringent analogy on which we downgraded the stocks in Apr’19 is comforted by regulators continued efforts in balancing interest of various stakeholders.
* We reiterate GUJGA as our top Buy amongst the CGDs and upgrade MAHGL to Buy due to probable changes in the regulatory landscape. We maintain Neutral on IGL owing to its expensive valuations.
Gas economies – favorable for continued higher margins
* The CGDs did not pass on the entire reduction in APM gas prices (from USD3.23/mmbtu to USD2.39/mmbtu) starting 1st Apr’20 to end customers.
* Factoring in the above mentioned price reduction; the CGDs should have taken ~INR4.0/scm cut in their retail selling prices. However, IGL/MAHGL took a price cut of only INR3.2/INR2.0, keeping the benefit of 20-50% with them.
* Also, the companies did not cut retail prices in 4QFY20 despite revision in Panna-Mukti fields (PMT) gas prices to APM prices starting Jan’20.
* Despite CGDs retaining a larger portion of the cut, the current price (in Delhi) of CNG offers huge savings of 104-138% to petrol/diesel and ~11% to Auto LPG (refer exhibit 7).
* GUJGA has not taken any price cut for its PNG-Industrial segment since Jun’19 despite LPG prices coming down to almost 30% cheaper now. While few consumers may switch, margins would definitely expand on the remaining volume.
* On the other hand, retail prices of auto fuels have aligned themselves with the decline in benchmark petrol/diesel prices. Crude oil appears to have stabilized at USD30/bbl and is likely to rise as OPEC++ keep cutting production and demand rises as the global economy emerges from COVID-19.
* The long-term contracts (which are average of the last 3/6-month Brent prices – down 46%/21%) are expected to see a downward revision in FY21 owing to the crash in crude prices over recent months. All of these would aid CGDs in garnering continued higher margins in the industrial segments
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