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Previously, supplies had been cut by about 21 per cent effective October 16.
International brokerage Jefferies downgraded MGL and IGL to ‘underperform
City gas distribution companies’ shares crashed 20 percent in the morning session on November 18 after the government cut the Administered Price Mechanism (APM) allocation to CGD players by 20 percent for the second month in a row.
At 10.20 am, shares of IGL cracked 20 percent to quote Rs 324.7, while MGL stock was around Rs 1,150.75 on the NSE, down 12 percent. Gujarat Gas shares sank over 5.8 percent to trade at Rs 458 apiece.
Subsequent Cuts in Gas Allocations
IGL and MGL have reported 20 percent and 18 percent additional cuts, respectively, over the 21 percent cut which was announced earlier on October 16, while Adani Total Gas has indicated a 13 percent cut.
Government’s Role in Gas Supply Reductions
The government has for the second time in a month cut supplies of cheaper domestically produced natural gas to CNG retailers, who warned of their profitability being hit.
IGL’s Response to Gas Allocation Cuts
IGL, which retails CNG to automobiles and piped cooking gas to households in the national capital and adjoining cities – in a stock exchange filing said domestic supplies have been cut by about 20 per cent effective November 16.
Previously, supplies had been cut by about 21 per cent effective October 16.
Impact on Profitability Due to Gas Allocation Cuts
“Based on another communication received by the company from GAIL (India) Ltd (the nodal agency for domestic gas allocation), this is to inform that there has been further reduction in domestic gas allocation to the company effective from November 16, 2024. The revised domestic gas allocation to the company is approx. 20 per cent lesser than previous allocation which will have an adverse impact on profitability of the company,” IGL said.
IGL gets domestic gas allocation for meeting the requirement of CNG sales volumes at the pricing fixed by the government (presently at USD 6.5 per million British thermal unit).
The alternative to this is to use imported gas, which is twice the domestic rate.
“The company is exploring all options to address the issue,” IGL said.
Challenges of Declining Domestic Gas Production
Natural gas pumped from below the ground and from under the seabed from sites ranging from the Arabian Sea to Bay of Bengal within India is the raw material that is turned into CNG for sale to automobiles and piped cooking gas to households.
Production from legacy fields, whose price is regulated by the government and which are used to feed city gas retailers, has been falling by up to 5 per cent annually due to the natural decline that has set in. This has led to supply cuts to city gas retailers.
Impact on CNG Supply
While the input gas for piped cooking gas that households get is protected, the government has cut supply of raw material for CNG. Gas from legacy fields used to meet 90 per cent of the demand for CNG in May 2023 and has progressively fallen. The supply was cut to just 50.75 per cent of the CNG demand beginning October 16 from 67.74 per cent last month. Now it has further been reduced.
Potential for CNG Price Hike
Buying imported and costlier liquefied natural gas (LNG) to make up for the shortfall may lead to a hike in CNG prices that varies from Rs 4-6 per kg, sources said.
Retailers Hold Off on Price Increase
For now, the retailers have not raised CNG rates as they are engaged with the Ministry of Petroleum and Natural Gas to find a solution, they said.
Brokerages React to Sharp Cuts
According to various brokerages, the steep pace of the cuts, coupled with no policy communication poses a sharp negative for the city gas distribution companies. Based on the previous communication, following the sharp cut in October, the further pace of cuts was expected to be more moderate and tapered.
“CGD companies highlighted that prices would be hiked post-festive season to partially recover lost margins. However, no action has been seen so far and with this additional cut, the margin outlook has deteriorated with no near-term clarity on the course of action,” said Emkay Global.
“The implied non-APM blended gas price for the companies were $13-14/mmbtu, hence, replacement by such gases would impact blended EBITDA/scm by Rs 2.7-3 and necessitate at least an Rs 4.5-4.8/kg hike,” added the brokerage.
Profitability Outlook for FY26
According to Nuvama Institutional Equities, with no price hikes and rising costs of input gas for the companies, the EBITDA in FY26 could take a 43–63 percent hit. The domestic broking firm downgraded IGL and MGL to ‘reduce’, while giving Gujarat Gas a ‘hold’ call.
Brokerage Downgrades Amid Lower Gas Allocations
International brokerage Jefferies downgraded MGL and IGL to ‘underperform’ with target prices cut to Rs 1,130 and Rs 295 per share, respectively. Lower APM allocation suggests that cheap domestic gas will soon be completely taken away. The brokerage cut the EPS estimates on MGL, IGL and Gujarat Gas by 31 percent, 27 percent and 19 percent, respectively.
