City gas distribution (CGD) players Indraprastha Gas and Mahanagar Gas shares cracked up to 15 per cent following the announcement that the government will reduce priority gas allocation to these companies.
Mahanagar Gas Ltd (MGL) shares fell by 14.5 per cent to today’s low of Rs 1,503.80, while Indraprastha Gas Ltd (IGL) tumbled 13 per cent to Rs 439.40 on the BSE.
According to a policy guideline from the Ministry of Petroleum and Natural Gas, domestically produced Administered Price Mechanism (APM) natural gas will be allocated to CGD companies for priority segments such as Domestic PNG and CNG (transport).
The policy specifies that CGD entities will receive gas only based on the available quantity allocated to GAIL (India) Limited for these segments.
“Allocation to the Company for CNG (Transport) has been reduced by ~20 per cent, effective October 16, 2024, compared to the previous average quarterly APM allocation. This being a major reduction in allocation, will have an adverse impact on the profitability of the Company,” said MGL in a filing to the exchanges.
With rising dependence on market-linked gas, CGD players will be forced to defend margins at the expense of volume growth. This could trigger a derating of the sector, noted Jefferies.
CGD companies are likely to be forced to pass on the majority (if not all) of the hike in gas cost to end-consumers as otherwise it will lead to a huge hit on their margins. Hiking CNG price by Rs 3.5-5/kg or 5-7 per cent is likely to further reduce the competitiveness of CNG, noted JM Financial.
The brokerage added that this is likely to further erode pricing power in the CNG business and pose a significant downside risk to volume growth and margins. JM Financial cut its rating on IGL and MGL to ‘sell’, with a target price of Rs 435 and Rs 1,400 each, implying a downside from current levels.
“We still see an upside in MGL and maintain our positive view on the stock amid strong volume growth, while retaining our negative view on IGL. In the near term, the upcoming Maharashtra election may delay MGL’s pricing action, but with a history of pricing proactiveness, the adverse profitability impact should be transitory,” said Emkay Global.
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