MGL, IGL Shares Dip 20% as City Gas Distribution Firms Reap Further Gas Cut
On November 18, 2024, stocks of two major city gas distribution companies—Mahanagar Gas (MGL) and Indraprastha Gas Ltd. (IGL)—plummeted nearly 20% after the government announced a second successive reduction in its Administered Price Mechanism (APM) gas allocation. This cut is expected to severely impact the profitability of these companies, leading to widespread concern among investors.
Government Slashes APM Gas Allocation Again
The recent reduction in the APM allocation means a further decrease in the supply of cheaper natural gas from older fields to city gas retailers such as IGL and MGL. Consequently, these companies will be forced to find alternative, more expensive sources of gas—such as New Well Gas or spot LNG—to meet demand, which will result in higher operational costs and increased margin pressure.
IGL and MGL have reported additional cuts of 20% and 18%, respectively, on top of the 20% cut already announced in October 2024. Adani Total Gas has been hit with a smaller reduction of 13%. These cuts further complicate the cost structure of CGDs, as they will need to purchase replacement gas at higher prices.
Profitability and Stock Prices
The second APM cut has had an immediate impact on market sentiment, causing a significant drop in stock prices. At 10:20 am on November 18, IGL shares fell by 20%, trading at ₹324.70 on the NSE. MGL dropped by 12%, trading at ₹1,150.75, while Gujarat Gas experienced a decline of over 5.8%, reaching ₹458. This follows the heavy selling pressure that IGL and MGL faced in October, following the first APM cut.
Market Sentiment Remains Negative Amid Growing Uncertainty
Brokerages and analysts have expressed concerns about the deteriorating market sentiment and the growing uncertainty surrounding the future of the CGD sector. There is increasing pessimism regarding the lost margins and the lack of immediate price hikes in response to the second APM cut. The absence of clear communication from the government about future gas supply policies has only heightened this uncertainty.
According to Emkay Global, the reduction in APM gas allocation is expected to negatively impact the profitability of CGD companies, potentially leading to a decline in EBITDA per standard cubic meter of gas by ₹2.7–3. To cope with rising gas costs, a price hike of ₹4.5–4.8 per kg is considered necessary, but no such action has been seen thus far.
Brokerage Downgrades and Profitability Issues
Nuvama Institutional Equities has downgraded IGL and MGL to ‘reduce,’ warning that EBITDA for FY26 could decline by as much as 43–63% due to rising input costs and the lack of price hikes. Global brokerage Jefferies has also downgraded IGL and MGL to ‘underperform,’ lowering their target prices to ₹295 and ₹1,130, respectively. The brokerage revised its EPS estimates for these companies, citing the significant negative impact of the APM cuts.
No Near-Term Prospects in Sight
The reduced gas allocation and the lack of clarity from the government have left stakeholders uncertain about the future of CGD companies. The increased reliance on costlier gas sources and the imperative price hikes to cover rising input costs expose the sector to significant volatility. With no clear solutions in sight, the future of the sector remains uncertain, and investors are keenly awaiting further policy updates from the government.
Conclusion
The second consecutive reduction in APM gas allocation has severely impacted the profitability of city gas distributors such as IGL, MGL, and Gujarat Gas. Rising input costs and the absence of immediate solutions have worsened the situation, leaving the future of the sector in doubt. Investors are closely monitoring the government’s statements on future gas policies and whether CGDs will be able to pass on the increased costs to consumers.
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