Domestic natural gas price hike may lift ONGC’s earnings by 16%: Kotak Equities

The government’s decision on Friday to raise prices of domestically produced natural gas is likely to have a positive impact on the earnings of Oil and Natural Gas Corp, Oil India and Reliance Industries, but the benefits are limited, believes Kotak Institutional Equities.

On Friday, the government raised domestic gas prices by over 40% to $8.57 per mBtu for the October-March period.

The hike in prices is higher than what Kotak Equities had expected, and it believes this will lift ONGC’s earnings by about 16%.

A $2 mBtu higher gas price will lift RIL’s earnings before interest, taxes, depreciation and amortization or EBITDA for the exploration and production business by nearly Rs 3,700 crores in 2023-24 (April-March), the brokerage said.

Although the hike is positive, Kotak Equities believes such a higher price is not sustainable and therefore limits the benefits for producers. Besides, the government could take away part of this benefit by imposing an additional windfall gains tax, the brokerage said.

CITY GAS DISTRIBUTORS
For these companies, the price hike will hurt the earnings as this will increase costs. In rupee terms, domestic gas prices are up by nearly 3.5 times since September 2021.

For every $1/mBtu gas price rise, city gas distributors need to raise compressed natural gas prices by Rs 4.7-4.9/kg. Based on the current hike, these companies will need an immediate increase of Rs 12-14/kg in the CNG price, said Kotak Equities.

“In our view, just as a distributor gas, CGDs cannot absorb gas price increases,” it said.

Given limited leeway to pass through the entire hike in prices, analysts expect the margins of these companies to remain under pressure.

However, Kotak Equities retained its positive view on the city gas distributors and is of the view that any near-term weakness in the stock would be an opportunity to buy. It has retained a “buy” rating on both Indraprastha Gas and Mahanagar Gas.