City Gas Stocks Hit Hard: MGL, IGL Fall 20% on Fresh APM Gas Allocation Cuts

Have you been tracking city gas distribution (CGD) stocks? If so, you might have noticed something alarming on November 18, 2024. Shares of key players like Indraprastha Gas Limited (IGL) and Mahanagar Gas Limited (MGL) plummeted by up to 20%, marking one of their sharpest declines in recent times.

This sharp drop follows the Indian government’s decision to cut the allocation of Administered Price Mechanism (APM) gas to CGDs for the second consecutive month.  

Let’s break down what happened, how it impacts the sector, and what this could mean for the companies involved.  

What is APM Gas Allocation, and Why is It Important?

APM natural gas is sourced from old domestic fields and priced significantly lower than gas from new fields or imported liquefied natural gas (LNG). For CGDs, this low-cost gas is critical because it helps them supply compressed natural gas (CNG) and piped natural gas (PNG) at competitive prices to consumers.  

When the government reduces APM gas allocation, these companies must look for costlier alternatives like New Well Gas, High-Pressure, High-Temperature (HPHT) gas, or spot LNG. This inevitably increases input costs, compressing profit margins and putting pressure on gas prices for end consumers.  

The Recent Cuts and Their Magnitude  

In October 2024, the government initially reduced APM gas allocations to CGDs by 20%. This was already a significant blow to their profitability. On November 16, 2024, a second round of cuts was announced:  

– IGL reported an additional 20% cut, bringing the total reduction to 40% in two months.  

– MGL faced an 18% additional reduction, piling on top of the earlier cut.  

– Adani Total Gas also indicated a 13% further reduction.  

The revised allocation levels mean companies need to rely more heavily on higher-priced gas, pushing their costs further. Source: MoneyControl 

Market Reaction  

The government’s decision to cut APM gas allocation sent shockwaves through the market, triggering a sharp sell-off in CGD stocks. IGL’s stock price plunged 20% to ₹325.05, marking a new 52-week low, with average trading volumes surging over tenfold. This decline pushed the stock below its previous low of ₹385.20, recorded on November 20, 2023. 

Similarly, MGL’s stock dropped 18% in intra-day trading to ₹1,075 on the NSE, edging closer to its 52-week low of ₹1,018, last seen on November 23, 2023. Both stocks have corrected significantly from their respective 52-week highs, with IGL down 43% and MGL down 46%. 

Meanwhile, Gujarat Gas shares saw a 9% decline, settling at ₹442.80 in intra-day trading. The widespread sell-off reflects investor concerns over CGD companies’ profitability challenges in light of these allocation cuts.

The Financial Impact on MGL & IGL

Both IGL and MGL have acknowledged the adverse impact on their profitability:  

• IGL’s statement highlighted that it receives a domestic gas allocation for CNG volumes at a government-fixed price of $6.5/MMBtu. With the revised allocation, the company foresees a sharp reduction in margins. IGL is now exploring alternatives to maintain supply stability, including long-term gas contracts and HPHT gas.  

• MGL noted a similar impact, emphasizing that it must bridge the shortfall using higher-priced alternatives. According to the company, the additional costs will necessitate significant price adjustments for CNG and PNG to offset lost margins.  

Brokerages have calculated the potential financial hit for CGD companies. Replacement gas, priced at around $13-14/mmbtu, could lower EBITDA per standard cubic meter (EBITDA/scm) by approximately ₹2.7-3. To recover this, CGD players must increase CNG prices by at least ₹4.5-4.8/kg. 

Source: MoneyControl

Broader Implications for CGDs  

This is not the first time CGDs have faced allocation cuts. The October 2024 reduction triggered heavy selling of CGD stocks, with analysts anticipating further challenges for the sector.  

The sharp pace of recent cuts and a lack of clear communication from policymakers have amplified market pessimism. According to Motilal Oswal Financial Services (MOFSL), CGD companies may need to hike CNG prices by ₹5-6/kg to maintain profitability. However, no action has been taken on price revisions so far, adding to the uncertainty.  

How will it Impact the Investors?  

The current situation has raised critical concerns among investors:  

1. Profitability Outlook: With escalating input costs, CGD margins are under pressure, and there’s no clarity on how or when companies will adjust prices to offset these impacts.  

2. Policy Ambiguity: The government’s lack of communication regarding the rationale for the cuts or any plans for stabilization has unnerved investors.  

3. Valuation Risks: Ongoing challenges could lead to further brokerage downgrades, which would weigh heavily on CGD stock valuations.  

The Road Ahead  

The CGD sector is at a crossroads. Companies struggle to adapt to the revised allocation framework by exploring costlier alternatives and potentially adjusting consumer prices. However, the absence of clear government policies and the sharp pace of cuts have left market participants wary of short-term recovery prospects.  

For now, CGD stocks are likely to remain under pressure, and investors will closely monitor any updates from companies and policymakers on how they plan to address these challenges.  

Conclusion:

Understanding the dynamics of the APM gas allocation cuts reveals that this is a critical moment for the CGD sector. While the immediate impact has been severe, the long-term implications depend on how quickly the companies can adapt and whether the government clarifies its policy direction.

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