The three companies have passed on only a portion — 50-70 per cent — of the lower gas prices in April to their consumers.
This is expected to give a boost to their operating margins (Ebitda) per standard cubic metre of gas (SCM) and help retain the momentum for their stocks, which have outperformed benchmark indices by 22 per cent over the past three months.
The prices of blended domestic gas have dropped to $2.4 per million British Thermal Units (MMBtu) in April 2020 from $3.3 per MMBtu earlier. In addition, gas produced from the Panna, Mukta and Tapti (PMT) fields has been sold at domestic prices since December 2019 after the expiry of the 25-year joint venture of ONGC with Reliance Industries and BG Exploration.
CGD companies could expand their Ebitda by up to 80 paise per SCM if they retain the benefit of lower PMT gas prices. Gas sourced from domestic allocation and PMT makes up nearly two-thirds of the gas procured with the remainder sourced from international markets where prices are currently subdued due to lower demand.
The three players have shown a sustained improvement in Ebitda per SCM over the past four years. MGL has the highest, which is expected to be around 9.9 in FY20 from 5.8 in FY16. IGL is likely to report Edbit/SCM at 6.5 from 5.3 in FY16 and for Gujarat Gas the expansion is likely to be 2 over the same period.
This margin expansion would offset the drop in volumes due to the lockdown. Bloomberg consensus estimates peg Edbita growth at 6-8 per cent and decline in volumes at 4-8 per cent in FY21. Gujarat Gas may report faster volume recovery given the higher proportion of industrial consumers.
Coming to valuations, the three players trade at a median forward price-earnings multiple of 18.5, which is higher than February. Given the expected improvement in margins and demand, they may retain these valuations.