India Oil &Gas:Gas price revision to benefit City Gas,hurt Upstream

Domestic gas price reduced, as expected

    The government has cut domestic gas price by 18% to USD2.5/mmbtu onGross Calorific Value basis effective 1October 2016. This price will be valid forsix months i.e. until 31March 2017. On net calorific value the gas price isreduced to USD2.8/mmbtu from USD3.4/mmbtu. The reduction is based on thepricing formula which is volume-weighted average of gas prices at four hubs:

    Henry Hub (USA), Alberta Hub (Canada), NBP (Europe) and Russian Hub. Wefactor domestic gas price of USD3.5/mmbtu in FY18and USD4.2/mmbtu inFY19in our models.

    ONGC and Oil India to be adversely impacted, City Gas companies to benefit

    Gas producers ONGC and Oil India would be the most adversely impactedfrom the reduction in gas price and we cut their FY18E EPS by 3-4%. We alsoroll forward the TP for ONGC and Oil India to Mar’18resulting in 10% increasein both to INR385and INR460respectively. There is only marginal impact onReliance Industries (Buy, INR1235TP) and GAIL (Sell, INR 350TP). City gasdistribution companies, which receive domestic gas for transportation (CNG)and household supplies (PNG), may benefit if they retain part of the benefit ofreduction in input cost. CNG/ household PNG currently accounts for ~80% ofvolumes for Indraprastha Gas (Hold, TP INR 595) and ~20% of volumes forGujarat Gas (Buy, TP INR 770). If they retain 10% of the gas price reduction,EPS improvement can be ~3% for IGL and ~2% for Gujarat Gas. However, itremains to be seen whether these companies will fully pass on the lower gascost to consumers or retain some of the benefit.