Regular price hikes by gas utilities like Gujarat Gas Ltd in the past few months have led to some moderation in offtake of gas by the industrial sector.
Domestic gas prices were raised 62% to $2.9/mmBtu from $1.79/MMBtu (Million British Thermal Units) effective October 1. Gujarat Gas also has the risk of sourcing imported LNG and spot gas for distribution. The sharp rise in the prices of spot gas and imported LNG (liquefied natural gas) meant that the company had to be more proactive in reducing costs.
A recent channel investigation by Jefferies India Pvt Ltd at Morbi Ceramics Cluster in Gujarat shows that current gas consumption remains at 75% of the pre-second wave peak. At 6.5-7.0 mmscmd and 5.7 mmscmd in November and December respectively, Morbi gas volume is lower than the 7.7-7.8 mmscmd volume observed during March 2021. MMSCMD is million standard cubic meters of gas per day.
Moderation in volumes is not good news, while limited volumes could help mitigate the risk of higher LNG prices. The price hike by the company indicates its strong pricing power. Lower spot gas exposure and pricing power would mean the company may be able to maintain margins.
On the positive side, analysts at Jefferies India say underlying demand may strengthen at 8 mmscmd. Morbi Ceramics Association expects demand to ideally be 8.5 mmscmd. Analysts say, “The volume growth outlook is strengthened by the fact that 75 per cent of the 50-60 plants in the Morbi cluster, which were expected to come online, have already been commissioned.”
Meanwhile, Gujarat Gas is also expanding its CNG (compressed natural gas) network and PNG (piped natural gas) network. Automobile and other non-industrial demand is likely to remain strong with gas being a much cheaper and cleaner alternative than other fuels. Geographical expansion enhances the volume outlook. Analysts at HDFC Securities Ltd expect a growth of 16% for Gujarat Gas from FY 2011-23.
“The medium-term business outlook remains intact, while lower spot exposure (due to decline in volumes) has eased concerns on near-term margins,” said analysts at Jefferies.
Gujarat Gas stock rose over 3% in morning trade on Tuesday.
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