Shares of Mahanagar Gas Ltd. (MGL) and Indraprastha Gas Ltd. (IGL) have seen a dramatic decline of up to 15% following the announcement of significant cuts to gas allocations for city gas distribution (CGD) companies. This reduction in priority gas allocation, which has dropped from approximately 70% to around 50%, has raised concerns about profitability and future pricing strategies for these companies.
Impact of Reduced Gas Allocations
The recent decision by the government to sharply cut the administered price mechanism (APM) gas allocation has sent shockwaves through the CGD sector. This marks the most substantial reduction in APM allocations, which have already seen a decline from over 85% at the beginning of FY24 to 72% currently. The management teams at both MGL and IGL have expressed concerns about the adverse impact on their profitability, indicating that they are in discussions with key stakeholders to mitigate the effects.At around 10:30 AM IST, shares of Mahanagar Gas were trading at ₹1,509.95, while Indraprastha Gas shares plummeted by 11.4% to ₹447.2. The market reaction reflects investor anxiety regarding the potential for increased costs and reduced margins in an already challenging economic environment.
Price Hikes Likely on the Horizon
With the reduced availability of cheaper domestic gas, CGD companies are expected to pass on a significant portion of the increased costs to consumers. Analysts suggest that this could lead to a hike in compressed natural gas (CNG) prices by approximately ₹3.5-5/kg, further impacting consumer affordability and potentially reducing demand for CNG vehicles.Brokerage firm JM Financial has downgraded its ratings on both IGL and MGL to ‘sell,’ setting target prices at ₹435 and ₹1,400, respectively. They warn that if these companies do not implement price hikes, earnings could be adversely affected by up to 32% for IGL and 20% for MGL.
Market Sentiment and Future Outlook
The sentiment in the market remains bearish as investors weigh the implications of these changes. With rising dependence on market-linked gas, CGD players may face challenges in maintaining margins while pursuing volume growth. Jefferies has noted that this situation could trigger a derating of the sector, emphasizing that maintaining profitability will be critical for these companies moving forward.Despite these challenges, some analysts maintain a positive outlook on MGL due to its strong volume growth potential, although they acknowledge that upcoming Maharashtra elections may delay any immediate pricing actions.
Conclusion: Navigating Uncertainty Ahead
In conclusion, the recent cuts in gas allocations have placed significant pressure on Mahanagar Gas and Indraprastha Gas shares, leading to a sharp decline in their stock prices. As these companies navigate rising costs and potential pricing adjustments, investors will need to monitor developments closely. The ability of CGD firms to adapt to this changing landscape will be crucial for their long-term profitability and market positioning.Disclaimer: The views expressed in this article are for informational purposes only and do not constitute financial advice. Investors should conduct their own research or consult with a financial advisor before making investment decisions as market conditions can change rapidly.
