New Delhi: CNG prices are likely to be hiked by Rs 8-12 per kg and that of gas piped to household kitchens by over Rs 6 per unit after the government raised the prices of input natural gas to a record, analysts said on Monday.
The government last week raised the prices of gas produced from old fields, called APM gas, to $8.57 per million British thermal unit from $6.1. The rates for gas produced from difficult fields were hiked to $12.46 from $9.92 per mmBtu. APM gas makes up for two-thirds of all gas produced in the country. This gas is converted into CNG for automobiles and piped to household kitchens for cooking.
Kotak Institutional Equities said APM gas prices are up nearly 5x in just a year - from $1.79 per mmBtu till September 2021 to $8.57. "We expect CGDs to raise prices, but only in tranches, impacting near-term earnings," it said.
For each $per mmBtu gas price rise, city gas distribution (CGD) entities need to raise the CNG price by Rs 4.7-4.9 per kg.
"For $2.5 per mmBtu price rise, and also for recent currency weakness, CGDs will need an immediate CNG price increase of Rs 12-14 per kg," it said adding CGDs cannot absorb gas price increases. In the past, CGDs have been able to pass on all cost increases, and per unit margins have been on long-term rising trends for CGDs.
According to ICICI Securities, piped cooking gas, called PNG, CNG prices will need to be raised by Rs 6.2 per standard cubic meter and Rs 9-12.5 per kg to fully pass on the impact of these high input costs.
"At best, we see only a slow gradual pass-through of these costs over third quarter (October to December)," it said. Jefferies said Indraprastha Gas Ltd, the firm that retails CNG and PNG in the national capital, will need to raise CNG price by Rs 8 per kg while Mahanagar Gas Ltd - the retailer in Mumbai - will have to increase prices by Rs 9.
"This would reduce CNG's discount to petrol/diesel from 45/30 per cent to 40/20 per cent for IGL. Similarly, the discount for MGL would reduce from 45/30 per cent currently to 40/20 per cent," it said. "This could impact volume growth."
As a key producer of domestic APM gas, a sharp 40 per cent increase in price is positive for upstream producers ONGC and Oil India. The price hike will boost ONGC's earnings by about 16 per cent, Kotak said.
"However, in our view, such high prices may not sustain for long. In addition, there is a risk that the government may take away benefits by imposing additional taxation, like the recent windfall tax on oil prices," it said.
But unlike APM gas, the benefits of higher rates for gas from new and difficult fields can sustain. Reliance Industries Ltd, with the largest new gas production, is a key beneficiary.