Stocks of gas companies have tanked up to 68 percent from their respective 52-week highs on the back of surging oil and gas prices amid the worsening Russia-Ukraine crisis.
The world and Europe are dependent on Russian for gas supply for 17 percent and 33 percent, respectively, of their total requirement. With the surge in gas prices in recent times impacting gas companies' margins, domestic brokerage house ICICI Direct has cut target prices for all 3 gas companies - Indraprastha Gas (IGL), Mahanagar Gas and Gujarat Gas.
Asian spot liquefied natural gas (LNG) prices have been on a rise buoyed by concerns over Russian supply to Europe as buyers shun Russian gas and LNG in response to its invasion of Ukraine. The average LNG price for April delivery into north-east Asia was estimated at $40.5 per metric million British thermal units (mmBtu), up $3, or 8 percent in just 1 week.
Bank home, IGL has fallen 63 percent from its 52-week high (hit on September 14, 2021) of ₹604 per share to currently trading around 370 on BSE. Meanwhile, MGL has sunk over 68 percent from its 52-week high of ₹1,284.45 per share, hit on June 17, 2021, to currently trading around ₹761. Gujarat Gas has lost over 50 percent from its 52-week high of ₹786.65, hit on August 4, 2021, to currently trading around ₹522 on BSE.
As per the brokerage, Gujarat Gas (GGL) has the highest share of the industrial segment in its sales mix (more than 70 percent of total volume). Gas procurement for this segment is largely catered by LNG, hence, overall
margin sensitivity to LNG price changes is higher, it noted.
If prices sustain at high levels, it will impact margins of Gujarat Gas as the company’s sourcing costs will be higher for incremental volumes, explained ICICI.
It further noted that the company had hiked prices for incremental volumes in Morbi Industrial area in January and believes that industrial volume growth will be limited for Gujarat Gas in the near term amid higher LNG prices.
The brokerage maintained a 'hold' call on Gujarat Gas but cut its target to ₹530 per share from ₹700 earlier. Similarly for IGL, the broekrage has a 'buy' call but reduced its target price to ₹395 from ₹475 earlier. For MGL, the brokerage has a hold call and its target price was decreased to ₹775 from ₹885 earlier.
For IGL and MGL, the industrial volume contributes less in the sales mix (in the range of 8-14 percent) compared to Gujarat Gas. However, higher spot LNG prices will impact both companies in the near term, added ICICI.
The brokerage retained a 'buy' rating on IGL on account of better volume growth prospects in the medium to long term. However, it decreased the firm's FY24E EPS to ₹17,8 from ₹21.9, down 19 percent.
Concerning MGL, the brokerage believes higher gas procurement costs due to a surge in LNG prices and lower domestic gas allocation will affect margins of MGL in the near term. Its FY24E EPS was also reduced 17 percent to ₹81.4 from ₹98.4.
The biggest cut in FY24E EPS was seen in Gujarat Gas from ₹28 to ₹21.1, down 24 percent.