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* The domestic (APM) natural gas price for H2FY23 has been increased by 41% to USD8.57/mmbtu (from USD6.1/mmbtu) on a GCV basis, while deepwater/HP-HT ceiling rose by 26% to USD12.46/mmbtu (from USD9.92/mmbtu in H1FY23).

* The increase came as a surprise, as we were of the belief that pending the Kirit Parikh panel’s recommendations, there could have been a status quo amid sustained inflationary pressures, windfall taxes on upstream and CNG players highlighting cost challenges.

* The APM hike was also sizably below our estimate of USD9.3 (ceiling was in-line), thus giving rise to doubt about the actual formula being used, though Russian local gas price is unknown. This may be transitory, with the Parikh panel developing a new formula.

* The gas price rise is a major positive for ONGC and Oil India, albeit a dampener on CNG economics for IGL (amid weaker oil prices). We keep our estimates and TP unchanged, though upstream has significant upside risk. Reiterate Buy on ONGC-Oil India.

A significant gas price rise, despite the odds: The increase in gas price, although a surprise, is commendable in terms of policy continuity in an adverse macroeconomic environment. The miss, however, is notable, as the benchmark for US-Canada averaged at ~USD5/mmbtu and for Europe at USD23-24/mmbtu during Jul ’21-Jun ’22, with their total volume share being ~80% in the mix. Hence, more clarity on the calculation is awaited this time round. The gas price rise could also have bearing on the Parikh panel’s recommendation and we believe USD5-6/mmbtu could be a long-term floor (which we have built) in a USD60- 70/bbl crude pricing scenario.

We maintain estimates for ONGC and Oil India, for now: We maintain our estimates for ONGC/Oil India, as we build-in USD6.1/mmbtu for FY23-24 and USD5/mmbtu for FY25 & beyond. This also covers any downside risks associated with the Parikh panel’s formula. If the USD8.57 price upholds till end-FY23, our FY23 EPS would revise upwards by 10% (Standalone)/11% (Consolidated) to Rs33.6/65.1. Based on the current run-rate, H1FY24 prices could cross USD11/mmbtu. If the same is assumed, then FY24E EPS goes up by 45%/47% to Rs35.8/76.6 per share. With significant earnings resilience (as windfall oil tax is also adjusted accordingly), upstream remains well placed; we reiterate our Buy rating on ONGC/Oil India, with Rs190/260 TP respectively. For GAIL, which consumes 3.2mmscmd of domestic gas for LPG production and pipeline internal consumption, the hike would have an annual EBITDA/EPS impact of Rs10.5bn/Rs1.2, contingent on the prevailing LPG and pipeline tariff pass-through. While October’s counter-seasonal cut in Aramco propane prices is a negative for GAIL, given risks of the FY23 earnings downgrade, we have a Buy on the stock (TP at Rs120/sh), with the broader outlook dependent on oil prices (Brent assumption of USD100/85/75 for FY23/24/25+) and any potential development on the tariff front.

CGD to again see price hikes in near term: CGD (CNG, domestic PNG), which saw major respite from additional domestic gas allocation in mid-August and cooling down of the retail pricing & margin scenario, would again see cost pressures till the Parikh panel sets gas prices at a more reasonable level. Per our broad calculations, IGL may require to take a ~Rs10/kg hike in Delhi CNG prices, while peers may need to raise prices even more. So far, many of the smaller players like ATGL, CUGL, and MNGL etc have raised prices by Rs3-4/kg, which seems to imply a staggered increase and major players like IGL, MGL and Gujarat Gas possibly following suit. Delhi CNG price being hiked to ~Rs85/kg would make it ~25% cheaper than the current petrol price, which is the hurdle rate for conversion (20-25%, as per industry). With Brent at USD85/bbl now, petrol prices have downside risks, though recovery of past losses and excise cuts could mean the status quo continues. We thus see a limited earnings downside for IGL and, pending the Parikh panel’s decision, retain Buy with TP of Rs465.

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