A lot of activity is taking place in the city's gas distribution space, and not for the best reasons. Price reductions have been implemented by MGL, IGL, and Gujarat Gas, the three companies. The rationale for this price reduction was mentioned by all of the companies involved, including IGL and MGL for the CNG section, and Gujarat Gas for the industrial segment, and all of them claimed decreased natural gas costs.
However, price reductions are a standard practice in the business world; so, why did the stock price drop by such a significant amount? This is because, at the same time, the oil minister stated in a press conference that reforms in the petrol sector have not yet reached the end consumers at a time when the government is focusing on affordable petrol prices. He also added that they are concerned about the high profits earned by these companies and that the government is prepared to take steps about pricing and ensure compliance by the companies.
In addition to this, the PNGRB also released a document on Wednesday (March 6), which stated that MGL's exclusivity in the Mumbai region will end in 2021. This means that they will no longer have exclusive rights to this region when it comes to the selling of CNG.
Let us make an effort to have an understanding of the margins that these companies are making before we proceed to examine the impact.
At 13.3, MGL achieved the highest EBITDA in the industry during the third quarter. IGL came in second with 7.2, while Gujarat Gas came in third with 4.8. Naturally, MGL and IGL have the most exposure to the CNG sector, and these factors have a direct influence on the consumers who shop at retail establishments. The profit margin for IGL during the past four years has been between 15 and 16 percent, whereas the profit margin for MGL over the past two years has been between 19 and 20 percent.
First, what caused the Street to be concerned? First, they are concerned about the government's participation in the CGD sector about pricing, which has been driven by the market up until this point. Secondly, they are concerned about the exclusivity concerns that some of these companies are facing, which could have an end shortly, resulting in increased competition and decreased volumes. It is feared that there will be a consequence for both the margin and the volumes.
We had a conversation with the PNGRB, which is the regulatory body, and they informed us that they have not gotten any information from the ministry regarding the reduction of CGD price. Furthermore, they stated that they have no intention of intervening in the regulation of day-to-day operations or getting involved in them. Furthermore, they expressed their support for market freedom.
When it comes to CGD infrastructure, the typical profit level is twenty percent, and they are not claiming that CGDs are making exceedingly normal profits. In an ideal world, a profit margin of 12–15% would be considered appropriate; yet, for the time being, businesses are making more than 20%, which causes them to be concerned.
What is the next step? To begin, the termination of exclusive rights for CGD corporations is still up for debate, and a definitive judgment is being expected about this matter. The precedents indicate that this could take ten years or more, and this may also occur for MGL. In the second place, if profits for CGDs were regulated, this would result in decreased capital expenditures within the sector, which would be in direct opposition to the government's objective of expanding the gas economy and infrastructure.
What kind of response do brokerages have to this?
Such ministerial announcements closer to elections are expected, according to Emkay, for example, given that price reductions for petrol and diesel have also been anticipated for a considerable amount of time. Nevertheless, price freedom ought to endure and continue to be related to market forces, and there has been no fundamental change regarding this matter.
According to Nuvama, more than half of the price reduction that MGL has implemented is due to the easing of spot prices. As a result, CNG is still fifty to thirty-five percent more competitive than petrol and diesel, and as a result, there is a possibility that volume will increase. The PNGRB has indicated that MGL's monopoly in Mumbai came to an end in April 2021; however, nothing can move forward until the court cases that are now pending are settled.
ICICI Sec says that, technically, the PNGRB Act does not allow for regulation of end-consumer prices and the signal they are getting from pronouncements may indicate a further lowering of priority gas allocation to the CGDs and this could create margin pressure for CGDs but they are puzzled by the need articulated by the regulator to increase penetration and talk about lower profits at the same time.
Additionally, this is the reason why Wall Street is concerned: the regulatory pressure that is being applied to these corporations, sis imilar to what we have seen for OMCs as well.