Shares of City Gas Distribution Companies (CDG) like IGL, MGL, Gujarat Gas have been under pressure in recent sessions. We try to answer some of the questions asked about the trend.
Why are shares of town gas distribution companies falling?
The aforementioned companies experienced a sharp margin decline for the December quarter due to a jump in high liquefied natural gas (LNG) prices. The CGDs have not been able to secure the full CNG/domestic priority gas requirements at government-administered prices. To make up for the shortfall, the CGDs were forced to make up for it with expensive spot LNG, which is their raw material. Average spot LNG prices held steady at >$29/MMBtu for the third quarter.
Were lower margins expected in Q3?
Yes, margins were expected to decline, but the decline was much worse for MGL and Gujarat Gas, while IGL reported margins better than estimated.
Have companies raised prices to pass on rising commodity prices?
During the third quarter, Gujarat Gas increased gas prices for industrial customers by Rs 20.5/scm (55%), CNG by Rs 13/kg (24%) and domestic gas prices by Rs 5 .7/scm (24%). IGL also increased its prices by 7.85 rupees/kg during the quarter and from the end of September, MGL increased CNG prices by 11.5 rupees/kg (22%) and domestic PNG prices by 7.6 rupees/mc (25%). However, prices were increased with a lag and are impacting margins in the short term.
Shares of CGD companies did not perform so well last year, how do valuations compare?
Gujarat Gas is the most expensive stock in the CGD space listed at 23.3X estimated earnings for FY23, followed by IGL at 15.1X, MGL which reported record margins this quarter has a support of valuation and trades at 8.3X.
How should investors approach these stocks?
Brokers believe the worst of rising gas prices is over for these companies and margins will see a slight uptick going forward. MGL at 8.1X provides valuation comfort, however, margin recovery will be key to watch. Additionally, APM gas prices are expected to rise in price further from April, so companies will need to take more price increases from these levels. In addition, the OMC have also asked for an increase in commissions for the use of pumps and there is also strong pressure for electric vehicles. Investors should monitor these developments before taking a call.
(Edited by : Jomy Jos Pullokaran)
First post: STI