Morgan Stanley (MS) has provided key insights into the performance and strategic pricing actions of city gas distribution (CGD) players, highlighting the recent calibrated price hikes in compressed natural gas (CNG) across Tier 1 and Tier 2 cities since November 2024. The report points to rising costs, increased regulatory scrutiny, and mid-cycle margins shaping the sector.

Key Highlights:

  1. Calibrated Price Hikes:
    City gas players have been gradually increasing CNG prices across various regions. Notable recent hikes include Jhansi, Udaipur, and Mumbai, where Mahanagar Gas (MGL) implemented an additional ₹1/kg price hike in December 2024, following a ₹2/kg increase in November.
  2. Future Pricing Outlook:
    Morgan Stanley estimates that if domestic gas is entirely replaced by LNG over the medium term, an additional 5-6% price hike may be necessary to maintain medium-term RoCE levels at 14-15%. This reflects the impact of higher LNG costs and rupee depreciation against the dollar.
  3. Pass-Through of Costs:
    The report expects 70-80% of gas cost increases to be passed through to consumers. This is driven by higher LNG prices and exchange rate pressures, alongside mid-cycle margins.
  4. Regulatory Scrutiny:
    Increased regulator scrutiny on CNG prices has emerged due to significant variations in pricing within states. Oil fuel retailers and private players often charge more than state-owned CGD entities (SOE CGDs), intensifying oversight.

Sector Challenges:

The sector faces a dual challenge of balancing price competitiveness with operational profitability. While price hikes help sustain margins, rising regulatory focus could limit flexibility for CGD players in determining rates.

Morgan Stanley’s analysis underscores the evolving dynamics in the city gas sector, with external cost factors and regulatory pressures playing a critical role in shaping the profitability and operational strategies of CGD companies.

Disclaimer: This article is for informational purposes only. Please consult a certified financial advisor before making any investment decisions.

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