MGL, IGL plunge up to 20% as govt reduces APM gas allocation to CGDs again

Motilal Oswal Financial Services believe that IGL shall be affected the most by this significant reduction in the domestic gas allocation, followed by MGL and then Gujarat Gas.

Shares of city gas distribution (CGD) companies -- Mahanagar Gas (MGL) and Indraprastha Gas (IGL) – plunged up to 20 per cent on the BSE in Monday's intraday trade after the central government further reduced administered price mechanism (APM) allocation of domestic gas to them. This is expected to have an adverse impact on the profitability of these gas distribution companies. The lower allocation will be applicable from November 16, 2024.

 

The stock price of IGL has tanked 20 per cent to Rs 326.70, hitting its 52-week low on the back of over 10-fold jump in average trading volumes. It has fallen below its previous low of Rs 382.80 that it touched on November 20, 2023.  MGL, meanwhile, has slipped 18 per cent to Rs 1,075 on the BSE in intra-day trade. The stock had hit a 52-week low of Rs 1,018 on November 23.  These stocks have corrected by 43 per cent and 46 per cent, respectively, from their respective 52-week high levels. Apart from that, shares of Gujarat Gas declined 9 per cent to Rs 442.80 on the BSE in intra-day trade on Monday.

 

 

IGL, in an exchange filing, said that based on a communication received by the company from GAIL (India) -- the nodal agency for domestic gas allocation -- there has been a further reduction in domestic gas allocation to the company effective from November 16, 2024.   Stock Market Crash Today

 

The revised domestic gas allocation to the company is approximately 20 per cent lesser than the previous allocation, which will have an adverse impact on profitability of the company, IGL said.

 

IGL further said that it gets domestic gas allocation for meeting the requirement of CNG sales volumes at the pricing fixed by the government (presently at $6.5/mmbtu). The company is exploring all options to address the issue, it added.

 

MGL , meanwhile, said the allocation of Administrative Price Mechanism (APM) gas to the company has reduced by approximately 18 per cent, effective November 16, 2024, compared to October 16, 2024, APM allocation. With this being a major reduction in allocation, it will have an impact on the profitability of the company.

 

To bridge this shortfall, MGL is exploring options to source gas through domestically produced High Pressure High Temperature (HPHT) gas, New Well/ Well Intervention gas (NWG) from ONGC, and benchmark-linked long-term gas contracts, so as to continue to provide gas to its customers with price stability. 

 

IGL and MGL had informed last month that as per an earlier communication received from GAIL, the government had cut allocation of cheaper APM gas (priced at $6.5/mmbtu) for the CNG business by around 20 per cent,  effective from October 16, 2024, compared to the the previous quarter’s average APM allocation.

 

Overall, brokerage firm Motilal Oswal Financial Services (MOFSL) estimates CGD companies will need to make compressed natural gas (CNG) price hikes of approximately Rs 5-6 per kg to maintain their EBITDA/scm margins, assuming de-allocated APM gas has been replaced with gas priced at $9-10/mmbtu. The brokerage firm had recently cut its EBITDA/scm estimates across CGD companies to account for the previous de-allocation, which was applicable from October 16, 2024, onwards.

 

MGL should be able to increase prices after Maharashtra elections are over in November 2024, according to the brokerage firm. Following this, the Delhi elections, which are due in February 25, will see IGL’s potential price hike deferred by several months, believes the brokerage firm.

 

As such, MOFSL continue to believe that IGL shall be affected the most by this significant reduction in the domestic gas allocation, followed by MGL and then Gujarat Gas. While IGL’s volumes saw a 9.8 per cent compound annual growth rate (CAGR) in FY16-24, the brokerage firm estimates a 7 per cent CAGR in FY24-27.  “We expect a 9 per cent CAGR in volume over FY24-27, driven by multiple initiatives implemented by the company, such as collaborating with OEMs to drive conversions of commercial CNG vehicles and providing guaranteed price discounts to new I/C-PNG customers,” the brokerage firm said.

 

“We believe the ad hoc sharp cut in APM gas allocation for the priority CNG segment is also a significant de-rating event for CNG dominated CGD companies like IGL and MGL (as CNG constitutes approximately 75 per cent of their volume) as it not only poses a risk to volume growth and margins but also raises significant uncertainty on the government’s future policy measures,” analysts at JM Financial Institutional Securities had said in its October 2024 report.