The administered prices of domestic gas — tied to overseas prices — reflect that volatility, with a hike from $2.9 per metric million British thermal unit, or mmBtu (October 2021-March 2022 period) to $6.1 per mmBtu (April 2022-September 2022).
However, gas is a necessary good, which means that a proportion of demand is not price-dependent. While the ceramic industry in Gujarat has shut down units, and power plants running on gas have also shut down, demand in the transport segment, household consumption, and the fertiliser segments are all price-independent.
Given price rises, most of the power capacity and ceramic industry had shut down by late October-December quarter (third quarter, or Q3) of FY22. There was less effect on first-quarter 2022-23 consumption.
This leaves an interesting situation for downstream gas players.
The Q3FY22 results of various gas companies show that tariff hikes have compensated for lower volumes in some cases.
Gujarat Gas has been the hardest hit because it is a major supplier to Morbi, where the ceramics industry has been pummelled, but higher tariffs have compensated somewhat.
Mahanagar Gas actually saw higher volumes of sales, but margins were squeezed because it could not fully pass on the price hikes.
Petronet LNG has seen higher volumes, although it has suffered lower earnings before interest, tax, depreciation, and amortisation sequentially and has to worry about high spot liquefied natural gas (LNG) cargo prices.
Given the high spot LNG prices, Gujarat State Petronet (GSPL) is also likely to see lower margins, pushing up its costs.
Analysts have slashed the growth estimates of most downstream players, but there are ‘buy’ recommendations for several stocks.
Several stocks of Indraprastha Gas, Mahanagar Gas, and Gujarat Gas are looking strong because they have been accumulated at around the current prices after bottoming out. However, there is a fundamental ‘sell’ recommendation on Gujarat Gas at the current price of Rs 449 and valuations of Rs 400.
Mahanagar Gas is at a current price of Rs 818. There are ‘buy’ recommendations, with price targets of Rs 980 and Rs 1,000.
In the case of Petronet LNG, it is at Rs 211, with ‘buy’ recommendations and price targets of Rs 260, Rs 298, and Rs 307.
Analysts have ‘buy’ recommendations on GSPL, with its current price of Rs 235 and targets of Rs 265 and Rs 340. In this case, the earnings estimates have been reduced.
There could be limited upsides for downstream companies until there’s a positive change in the geopolitical environment.
If global gas prices do start moving down, there could be a big upside since the domestic tariff will remain the same until September 30.
One subscription. Two world-class reads.
Already subscribed? Log in
Subscribe to read the full story →
Quarterly Starter
₹900
3 Months
₹300/Month
Smart Essential
₹2,700
1 Year
₹225/Month
Super Saver
₹3,900
2 Years
₹162/Month
Renews automatically, cancel anytime
Here’s what’s included in our digital subscription plans
Access to Exclusive Premium Stories Online
Over 30 behind the paywall stories daily, handpicked by our editors for subscribers


Complimentary Access to The New York Times
News, Games, Cooking, Audio, Wirecutter & The Athletic
Business Standard Epaper
Digital replica of our daily newspaper — with options to read, save, and share


Curated Newsletters
Insights on markets, finance, politics, tech, and more delivered to your inbox
Market Analysis & Investment Insights
In-depth market analysis & insights with access to The Smart Investor


Archives
Repository of articles and publications dating back to 1997
Ad-free Reading
Uninterrupted reading experience with no advertisements


Seamless Access Across All Devices
Access Business Standard across devices — mobile, tablet, or PC, via web or app