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…higher APM gas prices from 1st Oct’22 and expected decline in petrol/diesel prices could be the challenges to maintain competitiveness

* We expect a further upward revision in the APM gas price from 1st Oct’22 to USD9/ mmbtu (from USD6.1/mmbtu currently) led by high global gas prices in FY22.

* Every USD1/mmbtu rise in gas price requires ~INR4/kg hike in CNG price.

* Benchmark petrol/diesel prices have fallen to USD114/USD134 per bbl in the last few days from USD138/USD149 per bbl in 1QFY23 along with a decline in crude as well as crack spreads.

* The narrowing of CNG and auto fuel price gaps is likely to reduce CNG conversions and is negative primarily for IGL and MAHGL. GUJGA remains our top pick in the sector due to its much lower exposure to CNG compared with peers.

Bracing for higher CNG prices

* Domestic APM gas price from 1st Oct’22 is likely to be 49% higher than Apr’22 at ~USD9/mmBtu. CNG price in 2HCY22 needs to rise ~15% to pass on the increase in gas price to the customers.

* In the last six months, IGL/MGL/GGL have raised their CNG prices by 18%/33%/ 17%, respectively, from Mar’22 until Jul’22 due to ~2x increase in APM gas price from Apr’22 so as to protect their margins.

* Global gas prices have spiked (by 37-52%) due to the ongoing Russia-Ukraine crisis. US HH has risen to USD5.3/mmBtu during Jul’21-Jun’22 from USD3.9/mmBtu over Jan-Dec’21. Similarly, NBP has increased 52% while Alberta prices have risen 38%.

Lower competitiveness of CNG than petrol/diesel is a concern

* Along with crude oil, crack spreads have also risen sharply in 1QFY23 due to the ongoing Russia-Ukraine crisis, exacerbated by decline in export of refined products from China. As a result, petrol/diesel prices have risen 24%/32% in 1QFY23 QoQ.

* However, of late, due to recessionary fears, benchmark petrol/diesel prices have fallen 11%/4% in Jul’22 MTD v/s 1QFY23, respectively; while CNG price is trading at an all-time high of ~INR75-82/kg. This has reduced the savings potential of CNG v/s petrol/ diesel to 22%/16% from 36%/ 30% in Apr’22, respectively.

* Apart from the rise in APM prices, blending of non-APM gas is also forecasted to raise the cost of procurement for the CGDs; thereby, further reducing the savings potential of CNG v/s petrol/diesel.

Valuation and recommendation

* GUJGA remains our top pick in the sector due to its higher leverage to the industrial segment. GUJGA has the best RoCE profile of 30%. We expect an FCF generation of ~INR20b over FY23-24. The company is likely to turn net cash in FY23E, despite capex plans of INR20b over FY23-24E. We maintain our BUY rating on the stock with a TP of INR644 (premised on 25x FY24E EPS).

* MGL/IGL trade at 12x /17.5x FY24E EPS, respectively, and we add value of their investments to arrive at our TPs of INR1,001 /INR413; we maintain our BUY/ Neutral ratings on the stocks, respectively.

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