Indraprastha Gas' Margins Could Shrink Further — Here's Why
The recent domestic gas allocation cut by GAIL (India) will impact Indraprastha Gas' profitability negatively.
Indraprastha Gas Ltd.'s latest exchange filling on Friday reported that the company will see a further 20% cut of domestic gas allocation from GAIL (India) Ltd.
This marks the second cut is domestic gas allocation for the company. The first reduction was a 21% cuts by Oil and Natural Gas Corp.
Indraprastha Gas mainly gets APM or domestic gas allocation for meeting its CNG sales volumes requirement. This gas is received at a fixed price of $6.5 per million metric British thermal unit, and helps the company maintain its operating costs.
Impact Of Further Reduction
A further reduction of domestic gas allocation would be a negative for Indraprastha Gas' profitability, as the company will now have to replace the lost volumes and source gas from the spot LNG market. Prices in the spot LNG market currently trade at around $13 per million metric British thermal unit.
Based on first quarter numbers, Indraprastha Gas received 3.7 million metric standard cubic meter of APM gas per day. After ONGC's 21% allocation cut, these volumes would decrease to 3 million metric standard cubic meter of gas per day. The latest cut by GAIL (India) would imply Indraprastha Gas' domestic gas allocation could reduce to 2.4 million metric standard cubic meter of gas per day.
As per Emkay Research, the previous 21% cut in allocation would hit Indraprastha Gas' overall book margin by Rs 1.4-1.5 per standard cubic meter. The recent cut, which stands at the same range, would imply that margins could further be impacted by a similar amount.
It is key to note that the company's margins or Ebitda per standard cubic meter stood at Rs 6.5 in the second quarter of fiscal 2025, and have been under pressure for several quarters now.
Price Hike Required
In order for Indraprastha Gas to maintain margins, the company will have to hike prices. After the first allocation cut, Emkay Research stated that the company will have to take a Rs 3.3 per kilogram hike for its retail selling price. This hike could be of more quantum, considering the recent further cut.
