City Gas Distribution (CGD) stocks, including Mahanagar Gas (MGL), Indraprastha Gas (IGL), and Gujarat Gas, witnessed a sharp sell-off on Monday, November 18, after the government slashed Administered Price Mechanism (APM) gas allocation by another 20%. This is the second consecutive month of reductions, following a 13–14% de-allocation in October.
Stock Market Impact
- Mahanagar Gas (MGL): Shares plunged up to 15%.
- Indraprastha Gas (IGL): The stock dropped by 15%, reaching new lows in early trade.
- Gujarat Gas: Experienced an 8% decline.
- Adani Total Gas: Witnessed a smaller dip, down 4.4%.
What’s Behind the Decline?
The government’s decision to reduce APM gas allocation is expected to significantly impact the profitability of CGD companies. APM gas is a cheaper domestic resource, and its reduction forces companies to depend on more expensive alternatives like New Well Gas (NWG) or spot LNG, raising operational costs.
According to Indraprastha Gas, the revised gas allocation is 20% lower than the previous levels, adversely affecting its margins. Analysts have warned that this accelerated pace of de-allocation is a significant challenge for the sector.
Analysts’ Take
Nuvama Institutional Equities highlighted the sharp rise in input gas costs due to the shortfall in APM gas. With allocations falling to 30–35%, companies must rely on NWG priced at $8–9 per mmbtu and spot LNG priced at $14 per mmbtu. This could increase input gas costs by ₹2–6 per standard cubic meter (scm), potentially eroding EBITDA by 43–63% by FY26 if companies fail to implement price hikes.
Company-Specific Impacts
- Indraprastha Gas (IGL): With its high exposure to priority sector volumes, IGL faces the most significant risk. Analysts estimate a gross margin hit of ₹2–9 per scm, translating to an EBITDA downside of 21–104%.
- Mahanagar Gas (MGL): The company could see a gross margin impact of ₹2–10 per scm, resulting in a potential EBITDA downside of 16–73%.
- Gujarat Gas: Likely to face a gross margin impact of ₹1–4 per scm, leading to an EBITDA downside of 17–68%.
Ratings Downgrades
The ongoing challenges prompted several brokerages to downgrade CGD stocks:
- Indraprastha Gas (IGL): Downgraded to ‘Reduce’ with a target price cut to ₹369 from ₹513.
- Mahanagar Gas (MGL): Downgraded to ‘Reduce’ with a revised target price of ₹1,164 from ₹1,978.
- Gujarat Gas: Downgraded to ‘Hold’ with a target price cut to ₹509 from ₹666.
Looking Ahead
The recent developments have raised concerns about the structural growth of the CGD sector. While gradual APM de-allocation was anticipated, the sudden and steep cuts have disrupted market dynamics. Companies are now under pressure to balance rising costs with potential price hikes, which may affect demand.
Stay tuned for updates as the CGD sector navigates these turbulent times.
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