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CNG Supply Cuts to Hit Consumers’ Pockets: 2

CNG Supply Cuts to Hit Consumers’ Pockets: 2 Shares of city gas distribution (CGD) companies like IGL, MGL, and Gujarat Gas plummeted by 20% on November 18, 2024, following the government’s decision to cut the Administered Price Mechanism (APM) gas allocation by 20% for the second consecutive month. This move reduces the supply of low-cost domestic gas to CGDs, forcing them to seek more expensive alternatives like New Well Gas or spot LNG. As a result, the profitability outlook for these companies has worsened, with IGL and MGL reporting significant additional cuts of around 20% and 18%, respectively, following a similar reduction in October.

Brokerages have downgraded the stocks, citing a lack of clarity on how the companies will manage the situation. The reduced gas allocation is expected to have a major impact on their profit margins. IGL, in particular, has confirmed the adverse effect on profitability and mentioned that it is exploring options to address the issue, including raising gas prices, but no such action has been taken yet. With no immediate price hikes and rising input gas costs, analysts predict a potential 43-63% decline in EBITDA by FY26 for these companies. Several brokerages, including Emkay Global and Jefferies, have downgraded IGL, MGL, and Gujarat Gas, cutting their target prices significantly.

CNG Supply Cuts to Hit Consumers’ Pockets: 2 Shares of Indraprastha Gas Ltd (IGL), Mahanagar Gas Ltd (MGL), and Gujarat Gas experienced significant declines on November 18, 2024, after the government reduced APM (Administered Price Mechanism) gas allocations for the second time in a month. IGL’s stock dropped 18.89% to Rs 329.25, MGL fell 13.26% to Rs 1,137.50, and Gujarat Gas decreased by 6.03% to Rs 456.70.

Nuvama Institutional Equities highlighted that the 18-20% reduction in APM gas allocation, following the 13-14% cut in October, is a severe blow to the sector’s growth. IGL is particularly vulnerable due to its high dependency on priority sector volumes and lower margins compared to MGL. In contrast, Gujarat Gas, with its focus on the industrial segment and a lower share of priority sector volumes, may be better positioned to absorb the impact of the cut, thanks to its reliance on spot and contracted LNG.

Analysts predict that the cuts could significantly affect the companies’ profitability, with expected increases in input gas costs, particularly for New Well Gas and spot LNG, which could reduce EBITDA by 43-63% by FY26 without price hikes. Some brokerages, including JPMorgan and Jefferies, have downgraded IGL and MGL with revised target prices significantly lower than before. Emkay Global has also cut target prices for both companies and lowered earnings estimates, citing a lack of clarity on when or if price hikes will occur.

CNG Supply Cuts to Hit Consumers’ Pockets: 2 The Indian government has once again reduced the supply of domestically produced natural gas to CNG retailers, cutting supplies by about 20% starting November 16, 2024. This follows a similar 21% reduction in October 2024. Indraprastha Gas Ltd (IGL), which provides CNG for vehicles and piped cooking gas in Delhi and nearby areas, confirmed the cut in a filing, stating that the reduction would negatively impact the company’s profitability.

IGL, which previously relied on cheaper domestic gas priced at USD 6.5 per million British thermal units, now faces the option of sourcing more expensive imported gas, which is priced at twice the domestic rate. This price disparity could lead to a potential hike in CNG prices by Rs 4-6 per kg. However, CNG price adjustments have not been made yet, as IGL is in discussions with the Ministry of Petroleum and Natural Gas to find a solution.

The supply cuts are partly due to the natural decline in production from legacy gas fields, which are used to meet CNG demand. The share of gas from these fields dropped from 67.74% in September 2023 to just 50.75% of the CNG requirement in October, with further reductions expected. While household gas supplies remain unaffected, the continued cuts to CNG supply could lead to price increases, which are politically sensitive in major markets like Delhi and Mumbai, where elections are upcoming.