Markets

What new gas pricing norms will mean for IGL, Mahanagar Gas

When a market price determining mechanism is available, for producing companies it could result in a better realisation, says Deven R Choksey, MD, KR Choksey.

On natural gas marketing reforms
The government has approved the standardised e-bidding process for natural gas. The oil minister says that producers can choose any platform for e-bidding of natural gas but producing companies cannot participate in natural gas bidding. However, subsidiary companies can participate in the process. We will have to look into detail at some point of time but more important to me would be the pricing part of it.

When you start putting across the pricing in an open platform, it means that you are allowing the market price to get determined as against the government dictating the price and this is a fundamental change. I am happy about this because for the producing companies when the market price determining mechanism is available, it could possibly result in a better realisation. This could possibly allow them to command a better price.

Impact of new norms on IGL, Mahanagar Gas
This reform is basically suggesting a market driven pricing mechanism both for procurement as well as distribution of gas. IGL and MGL are utility companies that would basically be working on the spread. And now that the entire sector is opened up, they would have a competitive bidding process taking place and they would be in a position to buy their resources for the gas that are priced on different platforms based on their ability to do so.

I would think they would have a better mechanism to pass on this particular cost to the end customers. They would be in a position to maintain their spreads. From an investment point of view, one would look at these companies more on the basis of internal rate of return (IRR) that they generate and the return they are producing out of it.

One would like to have these stocks in the portfolio but more importantly, viewed against the complex gas pricing mechanism which the government used for determining price based on four different countries gas pricing and averaging them out, bringing the entire thing on the market platform gives me a good amount of confidence that these companies would be in a far better position to manage their purchases and yield better realisation out of it.

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