CHENNAI: Many people using petrol and diesel-powered vehicles have begun to seriously consider shifting to a cleaner, and cheaper, alternative such as compressed natural gas (CNG), but analysts now expect a price hike for domestic natural gas during the next scheduled price revision this October. This is set to put pressure on the profit margins of CNG suppliers such as Indraprastha Gas and Mahanagar Gas, and may lead to a rise in retail prices too.
A report from Motilal Oswal released on Monday says that CNG firms are set to face their “steepest uphill battle ever” due to the expected price hike. The problem for gas manufacturers is that the past few quarters have presented especially favourable conditions which are now likely to change.Starting April 2019, the price of domestic gas (the key raw material for CNG) fell from $4.1 per metric million British thermal unit (mmBtu) to just $1.8 mmBtu currently. However, CNG companies raised retail CNG prices (in New Delhi) to Rs 43.4 per kg from Rs 37.9 per kg during the same period.
This resulted in lucrative price equations and profit margins, with earnings before interest, taxes, depreciation, and amortisation (EBITDA) per standard cubic meter (scm) of CNG rising during the period. IGL’s EBITDA/scm rose by 44 per cent to Rs 8/scm while MGL saw it doubling to Rs 12/scm during the same period.
However, oil and gas producer ONGC’s chairman and managing director Subhash Kumar told analysts during a call last week that domestic natural gas prices are likely to “increase by 50-60%for the October 2021-March 2022 period”. Brokerages also expect an increase, with Emkay Global expecting a 58% rise to $2.8 per mmBtu and Motilal Oswal to $2.86.
Analysts expect this spike to reflect in both CNG pricing and margins for IGL and MGL. “For every $1 per mmBtu increase in domestic gas price, IGL and MGL need to take an Rs 4 per kg hike in CNG, excluding taxes,” Motilal Oswal warned, “Combined with the persistent demand of OMCs to raise commissions, both IGL and MAHGL appear staring at the steepest uphill battle so far.”
When contacted, IGL said that it does not comment on future pricing.