MGL, IGL stocks tank up to 14%; Why are CGD shares falling in trade today?

APM gas allocation cut by around 20% for CNG segment will have an adverse impact on the profitability of MGL and IGL

Shares of city gas distributors (CGDs) — Mahanagar Gas (MGL) and Indraprastha Gas (IGL) – plunged up to 14 per cent on the BSE in Friday’s intraday trade. The shares came under heavy selling pressure after a 20-per cent ad hoc reduction in allocation of cheap Administrative Price Mechanisms (APM) gas for the compressed natural gas (CNG) segment w.e.f. October 16, 2024, worried investors.

The managements of both companies expect an adverse impact on their profitability and are in discussions with key stakeholders to minimise the impact.

Mahanagar Gas (MGL) share price tanked 14 per cent to hit an intraday low of Rs 1,512.50, while Indraprastha Gas (IGL) share price slipped 13 per cent to Rs 439.40 on the BSE on the back of over two-fold jump in average trading volumes. In comparison, the BSE Sensex was down 0.51 per cent at 80,597 at 10:06 AM.

Allocation to MGL for CNG (Transport) has been reduced by around 20 per cent, and the revised domestic gas allocation to IGL is approximately 21 per cent lesser than previous allocation effective October 16, 2024, the companies informed via stock exchange filings.

IGL said the company gets domestic gas allocation for meeting the requirement of CNG sales volumes at the pricing fixed by the Government (presently at $6.5/mmbtu).

“Based on communication received by the company from GAIL (India) (the nodal agency for domestic gas allocation), there has been a major reduction in domestic gas allocation to the company effective from October 16, 2024. The revised domestic gas allocation to the company is approx. 21 per cent lesser than previous allocation which will have an adverse impact on profitability of the company,” IGL said. The company further said it is in discussion with key stakeholders to minimise the impact.

“Allocation to the company for CNG (Transport) has been reduced by nearly 20 per cent, effective October 16, 2024, compared to previous average quarterly APM allocation. This being a major reduction in allocation, will have an adverse impact on the profitability of the company,” MGL said.

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

As per Policy Guideline dated August 10, 2022, issued by the Ministry of Petroleum and Natural Gas, domestically produced APM natural gas is to be allocated to CGD companies for priority segments, specifically domestic pipelined natural gas (PNG) and CNG (Transport). The policy states that the supply of domestic gas to CGD entities will be made only up to the quantity available and allocated to GAIL (India) for these segments

In line with this policy, the CGDs were allocated APM natural gas for domestic PNG and CNG (Transport) based on APM gas availability.

This is in addition to the ongoing reduction in proportion of APM gas allocation by 6-8 per annum for CNG/domestic PNG segment as entire growth is being met via expensive non-APM gas sources.

According to analysts at JM Financial Institutional Securities, the above cut is likely to result in ~4mmscmd of cheap $6.5/mmbtu APM gas being replaced with expensive gas costing $10-14/mmbtu (like domestic HPHT gas, new well/well intervention from ONGC and LNG imports).

This will likely result in weighted average gas cost for the CNG business rising by $0.7-1/mmbtu, which implies a CNG price hike of Rs 3.5-5/kg or 5-7 per cent. This will likely further erode pricing power in the CNG business and pose a risk to volume growth and margins, the brokerage firm said.

Further, it’s a significant de-rating event for CNG-dominated CGD companies like IGL and MGL (as CNG constitutes ~75 per cent of their volume) as it significantly raises uncertainty on the government’s future policy measures, it added.

Hence, analysts have reduced IGL and MGL’s FY25-27 earnings before interest, taxes, depreciation, and amortisation (Ebitda) estimate by 10-13 per cent and cut target prices to Rs 435 for IGL and to Rs 1,400 for MGL. It has downgraded both the stocks to SELL.