The Union Cabinet on April 6 agreed to the Kirit Parikh committee’s recommendations on gas pricing, helping gas company shares climb on April 10. Shares of Indraprastha Gas Ltd (IGL), Mahanagar Gas Ltd (MGL), Gujarat Gas, Adani Total Gas and GAIL India were trading 1-5% higher on the BSE at 9:45 am.

The Union Cabinet on Thursday approved revised domestic gas pricing guidelines. Union Information and Broadcasting Minister Anurag Thakur told a news conference that domestic gas pricing will now be linked to imported crude oil pricing, set at 10% of India’s crude oil basket, and revised monthly. Currently, gas prices are set every six months. They are based on the prevailing volume-weighted prices for 12 months at four gas trading hubs – Henry Junction, Albena, National Balance Point (UK) and Russia quarterly.

Domestic natural gas prices currently stand at $8.57 per million British thermal units as of April 1 and are expected to drop immediately following the introduction of the new pricing mechanism.

The government established the Kirit Parikh committee to study the gas pricing mechanism. The Administrative Price Mechanism (APM) price has risen to $8.6 per million British thermal units between October 2022 and March 2023, making compressed natural gas available in a few cities. More expensive than dirtier alternative fuels, Motilal Oswal Financial Services said.

Following this development, CGD announced a reduction in CNG and PNG prices over the weekend. Analysts believe this could help city gas distribution companies boost future sales.

Motilal Oswal maintained his ‘sell’ call on IGL as EVs threaten the company’s long-term growth potential and pose a significant risk to its valuation. It has a ‘buy’ rating on MGL due to its attractive valuation, while Gujarat Gas remains the top pick among CGD due to its higher industrial exposure.

CLSA has a ‘buy’ recommendation on IGL, MGL and GAIL India following the announcement of the new gas pricing formula. Despite the price cuts, calculations point to attractive spot unit margins for MGL and IGL while adding that discounts on diesel have risen to 30%, restoring pricing power.

Jefferies maintains IGL as its top pick with a target price of Rs 540, with a ‘hold’ rating on MGL and GAIL shares and an ‘underperform’ rating on Gujarat Gas. The foreign brokerage sees city gas companies benefiting from lower raw material costs.

According to Jefferies, GAIL can save Rs 1,100 crore annually in the cost of LPG feedstock. The brokerage has raised its FY24 EBITDA estimates for IGL, MGL and Gujarat Gas by 20%, 19% and 6%, respectively.