CGD Stocks Tank 14% Amid Gas Allocation Cuts

CGD companies’ stocks drop on gas allocation cut

CGD Stocks Tank 14% Amid Gas Allocation Cuts  Shares of city gas distribution (CGD) companies, Indraprastha Gas (IGL) and Mahanagar Gas (MGL), dropped by up to 14% following the announcement of a sharp cut in priority gas allocations to around 50%, down from the current 70%. This reduction, the largest in recent times, follows a steady decline in APM gas allocation from over 85% at the start of FY24 to more than 72% currently.

Both companies foresee a negative impact on profitability and are in discussions with stakeholders to mitigate the effects. By 10:30 AM, MGL’s stock was trading at ₹1,509.95 on the NSE, while IGL’s shares fell 11.4% to ₹447.2.

Jefferies noted that with increased reliance on market-priced gas, CGD firms will face pressure to maintain margins, potentially at the cost of volume growth, which could result in sectoral downgrades. JM Financial suggested that CGD companies might have to pass on most of the gas price hike to consumers, potentially raising CNG prices by ₹3.5-5/kg (5-7%). This could reduce CNG’s competitiveness and negatively impact margins and growth. As a result, JM Financial downgraded IGL and MGL to ‘sell’, setting target prices of ₹435 and ₹1,400, respectively.

Emkay Global remained more optimistic about MGL, citing strong volume growth, though it retained a negative outlook on IGL. While the Maharashtra elections might delay MGL’s pricing decisions, Emkay believes any negative profitability impact will likely be temporary.

CGD Stocks Tank 14% Amid Gas Allocation Cuts Shares of city gas distributors (CGDs) Mahanagar Gas (MGL) and Indraprastha Gas (IGL) saw significant declines of up to 14% during intraday trading on the BSE on Friday. This drop was triggered by a 20% ad hoc reduction in the allocation of cheap Administrative Price Mechanism (APM) gas for the compressed natural gas (CNG) segment, effective October 16, 2024, causing concern among investors.

Both companies’ management teams anticipate a negative impact on profitability and are engaging with key stakeholders to address the situation. MGL’s share price fell 14% to an intraday low of ₹1,512.50, while IGL’s shares dropped 13% to ₹439.40, accompanied by more than double the usual trading volumes. In contrast, the BSE Sensex was down 0.51% at 80,597 at 10:06 AM.

The gas allocation for MGL’s CNG (Transport) segment has been reduced by about 20%, while IGL’s revised domestic gas allocation is approximately 21% lower than the previous levels, as stated in their stock exchange filings. IGL noted that its domestic gas allocation is essential for meeting CNG sales volumes at government-fixed prices (currently $6.5/mmbtu).

CGD Stocks Tank 14% Amid Gas Allocation Cuts  IGL reported a significant reduction in its domestic gas allocation from GAIL (India), the agency responsible for gas distribution, stating that this will adversely affect its profitability. MGL echoed similar concerns regarding its allocation cut, indicating it will negatively impact profitability.

To mitigate the shortfall, MGL is exploring alternatives for sourcing gas, such as domestically produced High Pressure High Temperature (HPHT) gas, new well/well intervention gas from Oil and Natural Gas Corporation (ONGC), and long-term contracts linked to market benchmarks to maintain price stability for customers.

According to policy guidelines from the Ministry of Petroleum and Natural Gas, domestically produced APM natural gas is to be allocated to CGD companies for priority segments like domestic piped natural gas (PNG) and CNG (Transport). However, ongoing annual reductions in APM gas allocation of 6-8% mean that the growth in demand is increasingly being met with more expensive non-APM gas sources.

CGD Stocks Tank 14% Amid Gas Allocation Cuts  Analysts at JM Financial Institutional Securities predict that this reduction will replace approximately 4 mmscmd of cheap APM gas with costlier options ranging from $10 to $14/mmbtu. This shift is likely to increase the weighted average gas cost for the CNG business by $0.7 to $1/mmbtu, resulting in a price hike for CNG of ₹3.5 to ₹5/kg (5-7%). This price increase could diminish pricing power in the CNG market and pose risks to both volume growth and profit margins.

The report indicates that this is a significant de-rating event for CNG-centric CGD companies like IGL and MGL, as CNG accounts for roughly 75% of their volumes, leading to increased uncertainty regarding future government policy measures. Consequently, analysts have reduced their EBITDA estimates for IGL and MGL for FY25-27 by 10-13% and lowered target prices to ₹435 for IGL and ₹1,400 for MGL, downgrading both stocks to a ‘SELL’ rating.