CNG Price Cut: Will Mahanagar Gas Be Able To Sustain Its Margins?
Lower feedstock and spot LNG prices, new geographical areas and low EV penetration could help protect Mahanagar's margins, Jefferies said.
Mahanagar Gas Ltd. stock declined approximately 18% after the CNG price was cut by Rs 2.5 per kilogram in Mumbai. This has resulted in the stock taking a 13% beating over a month period.
The negative reaction stemmed from concerns about higher regulatory risk for the fuel company, after Minister for Petroleum and Natural Gas, Hardeep Singh Puri, said the Union government was willing to take measures to ensure that the full benefit of reforms is passed on to end-consumers.
This was compounded by the news that Mahanagar Gas' distribution exclusivity in the Mumbai Metropolitan Region ended in 2021. However, the impact on margins may not be as high as previously expected.
Falling Feedstock Costs
Mahanagar Gas' margin decline will be cushioned by falling feedstock costs, according to Jefferies.
The price of high-pressure, high-temperature gas is expected to fall 10% from current levels, as noted in a March 20 note. The fall is expected to take effect from April 1, as additional volume from Oil and Natural Gas Corp. will be available to meet the current shortfall caused by a decline in Administrative Price Mechanism allocation.
Mahanagar Gas purchases gas in order to distribute it to customers. Lower HPHT gas prices mean that the company will pay less for the gas itself, translating into lower input costs for the city gas distributor.
While Jefferies estimates a decline in FY25 margins from Rs 12.3 per standard cubic metre of gas to Rs 11.5 per standard cubic metre of gas due to the price cut, Mahanagar Gas' margins will still remain at the upper end of the management's guidance of Rs 10–12 per standard cubic metre of gas, the brokerage said.
Soft LNG Prices
According to futures, which is based on the Platts JKM (Japan Korea Marker)—the benchmark price assessment for spot physical cargoes of Liquefied Natural Gas delivered to Northeast Asia—LNG prices have dropped 11.08% year-to-date.
Jefferies expects spot LNG prices to remain subdued in the near term. Despite Red Sea disruptions and peak winter demand behind, the brokerage notes that gas inventory levels in Europe and the U.S. trending above past averages, easing the tight demand balances witnessed post the Russia-Ukraine crisis.
Qatar and the U.S., which account for 30% of global capacity, have new LNG supplies coming online over 2024–26. This capacity addition could also keep LNG prices lower.
For Mahanagar Gas, the share of spot LNG in priority sector volumes remains low at 4.5%, Jefferies said. The low spot rates give the company an opportunity to purchase spot LNG at subdued prices to protect margins.
Latest Acquisition
Mahanagar Gas Ltd. also acquired 100% stake in Unison Enviro Pvt. for Rs 562 crore in early February 2024. This acquisition helps the city gas distributors acquire new geographical areas of Ratnagari, Latur and Osmanabad in Maharashtra as well as Chitradurga and Davangere in Karnataka.
Unison Enviro's current volumes stand at 0.13 million metric standard cubic meters of gas per day and observes a 18-20% year-on-year volume growth.
On account of this acquisition, Jefferies estimates an 11% YoY volume growth in FY25 for Mahanagar Gas.
EV Penetration Risk
While peer Indraprastha Gas Ltd. could see volume risk in Delhi NCR region on strict electric vehicle policies, penetration risk to Mahanagar Gas stands low.
EV penetration in the MMR region stands around 4-5% compared to 10-12% in NCR. This is mainly due to infrastructure constraints and absence of strong regulatory push for EVs, Jefferies said.
