International brokerage Jefferies downgraded MGL and IGL to ‘underperform’
Shares of city gas distribution companies fell by 20 percent in the morning session on November 18 as the government reduced the Administered Price Mechanism (APM) allocation to CGD players by 20 percent for the second month in a row.
At 10.20 am, IGL shares tumbled 20 percent to Rs. 324.7 was quoted, while MGL’s share on the NSE was trading at Rs. 1,150.75, down 12 percent. Gujarat Gas’ share fell by over 5.8 percent to Rs. 458 was traded.
Subsequent cuts in gas allocation
IGL and MGL reported additional cuts of 20 percent and 18 percent, respectively, compared to the 21 percent cut announced earlier on October 16, while Adani Total Gas reported a 13 percent cut.
Government’s role in reducing gas supply
For the second time in a month, the government has cut the supply of cheap domestically produced natural gas to CNG retailers, who warned of a hit to their profitability.
IGL’s response to gas allocation cuts
IGL – which retails CNG to automobiles and piped cooking gas to households in the national capital and surrounding cities – said in a stock exchange filing that domestic supply has been reduced by around 20 per cent since November 16.
Earlier, supply was cut by around 21 percent since October 16.
Impact on profitability due to cuts in gas allocation
“Based on other communication received by the Company from GAIL (India) Limited (Nodal Agency for Domestic Gas Allocation), it is to be stated that the domestic gas allocation to the Company has been further reduced with effect from November 16, 2024. The revised domestic gas allocation to the company is approx. 20 per cent less than the previous allocation which will adversely affect the profitability of the company,” IGL said.
IGL receives domestic gas allocation to meet the CNG sales volume requirement at government-fixed prices (currently at USD 6.5 per million British Thermal Units).
The alternative is to use imported gas, which is double the domestic rate.
“The company is exploring all options to resolve this issue,” IGL said.
Challenges of declining domestic gas production
Natural gas pumped underground and under the seabed from places within India from the Arabian Sea to the Bay of Bengal is the raw material that is converted into CNG for sale in automobiles and piped cooking gas to households.
Production from legacy fields, whose price is regulated by the government and which is used to feed city gas retailers, is declining by up to 5 percent annually due to natural depletion. Due to which the supply in the city has decreased. Gas Retailers.
Impact on CNG supply
While the input gas for piped cooking gas to households is safe, the government has reduced the supply of raw material for CNG. Gas from legacy fields was used to meet 90 per cent of CNG demand in May 2023 and has declined progressively. Supply was reduced to just 50.75 percent of CNG demand starting October 16 from 67.74 percent last month. Now it has been further reduced.
CNG price likely to rise
Buying imported and expensive liquefied natural gas (LNG) may increase the price of CNG to cover the shortage by Rs. Varies from 4-6, sources said.
Retailers prevent price hikes
Currently, the retailers have not hiked the CNG rates as they are engaged with the Ministry of Petroleum and Natural Gas to find a solution, they said.
Brokerage reacts to sharp cuts
According to various brokerages, the sharp pace of cuts, and without policy communication, creates a sharp negative for the city’s gas distribution companies. Based on earlier communications, the further pace of cuts was expected to be more moderate and lower, following the sharp cut in October.
“CGD companies highlighted that prices will be hiked after the festive season to partially recover lost margins. However, no action has been seen yet and with these additional cuts, the margin outlook has deteriorated with no near-term clarity on the course of action,” MK Global said.
“The implied non-APM blended gas price for companies was $13-14/mmbtu, therefore, switching to such gas would impact blended EBITDA/scm by Rs 2.7-3 and would require at least a Rs 4.5-4.8/kg increase,” the brokerage said. added
Profitability Outlook for FY26
According to Nuwama Institutional Equities, EBITDA could take a 43-63 per cent hit in FY26, with no price hike and rising input gas costs for companies. The domestic broking firm downgraded IGL and MGL to ‘reduce’, while gave Gujarat Gas a ‘hold’ call.
Brokerage downgrades amid lower gas allocation
International brokerage Jefferies downgraded MGL and IGL to ‘underperform’ and cut target prices to Rs. 1,130 and Rs. 295 per share. A lower APM allocation suggests that cheaper domestic gas will soon be phased out completely. The brokerage cut EPS estimates for MGL, IGL and Gujarat Gas by 31 percent, 27 percent and 19 percent respectively.