On November 18, 2024, shares of Indraprastha Gas Ltd (IGL) and Mahanagar Gas Ltd (MGL) hit their respective 10% lower circuit limits, closing at ₹365.40 and ₹1,180.30. Meanwhile, Gujarat Gas saw a decline of 4.15%, dropping to a low of ₹466. This downturn follows a significant reduction in the allocation of APM (Administered Price Mechanism) gas to city gas distributors (CGDs), which has raised concerns about the future profitability of these companies.
Reasons Behind the Decline: Reduction in APM Gas Allocation
According to analysts from Nuvama Institutional Equities, the recent announcement of an 18-20% reduction in APM gas allocation for CGDs—on top of the 13-14% de-allocation made last month—poses a substantial challenge for the sector’s growth. This drastic cut is expected to impact the operational margins of IGL and MGL significantly, as both companies rely heavily on priority sector volumes.
- IGL and MGL’s Exposure: Both companies have over 80% of their volumes sourced from priority sectors, making them particularly vulnerable to these changes.
- Gujarat Gas’s Advantage: In contrast, Gujarat Gas has less than 40% of its volumes tied to priority sectors and primarily sources its gas through spot and contracted LNG, potentially mitigating some impacts from the APM shortfall.
Analyst Insights
Oil and gas analysts have expressed concerns regarding the rapid pace of APM allocation cuts:
- The government has reduced access to cheaper APM gas priced at $6.5/mmBtu, which is critical for CGD operations.
- The cumulative cut of approximately 35% in APM allocation over the past month has led to negative sentiment in the market.
Financial Impact
Analysts estimate that the overall input gas cost for CGDs could rise by $2–6/scm, which may lead to a staggering 43–63% decline in EBITDA for FY26 if price hikes are not implemented.
Target Price Adjustments
In light of these developments:
- JPMorgan downgraded MGL from ‘Overweight’ to ‘Neutral’, adjusting its target price down to ₹1,300.
- IGL was downgraded to ‘Underweight’ with a revised target price of ₹343.
- Other firms like Jefferies have also cut target prices for IGL and MGL significantly.
Market Sentiment and Future Outlook
The market is currently grappling with uncertainty regarding future gas pricing and allocation policies. Analysts suggest that without timely price adjustments, both IGL and MGL could face severe margin compression:
- Emkay Global estimates a potential hit of 46% on IGL’s EBITDA per SCM against Q2 run-rate figures.
- The lack of clarity from government officials regarding excise duty alignment between CNG and other fuels further complicates the outlook.
Conclusion
The significant drop in shares of IGL, MGL, and Gujarat Gas reflects broader concerns about the sustainability of their business models amid ongoing regulatory changes. Investors should remain cautious as they navigate this turbulent landscape, keeping an eye on potential policy shifts that could affect gas pricing and availability.
Disclaimer: This article is intended for informational purposes only and should not be construed as investment advice. Readers are encouraged to conduct their own research or consult with certified financial advisors before making any investment decisions based on market trends or stock performances.
