From IGL to MGL to Gujarat Gas: CGD stocks tank up to 20%; here's why
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Shares of city gas distribution (CGD) companies were reeling under selling pressure on Monday following the government's decision to reduce the Administered Price Mechanism (APM) gas allocation by 20% for the second consecutive month.
Weighed down by the development, shares of Indraprastha Gas (IGL) plunged 20% to a one-year low of ₹324.70, while Mahanagar Gas (MGL) fell 18% to ₹1,075.25 on the NSE today. Gujarat Gas dropped 9% to ₹442.50; Adani Total Gas declined 5% to ₹652.15; and Gujarat State Petronet saw an 8% dip, hitting ₹322.20, during intraday trade. The Nifty Oil and Gas index has declined 2%, reaching 10,634, with 13 stocks in the red and only two showing minor gains.
The sharp sell-off reflects market concerns over rising input costs due to lower APM gas availability, impacting profitability expectations.
What is the APM allocation? How will CGD companies be impacted with the APM cuts?
Since October, the Centre has cut APM gas allocation to CGD firms by 35%. While this decline was expected, the scale and speed of the cuts are seen as a significant setback for the sector. A reduction of 13-14% was made in October, followed by an 18–20% cut in November.
India has different allocation processes and pricing strategies for various gas types. APM and non-APM gas prices are government-regulated while pricing for gas from NELP and Pre-NELP fields follows terms in the Production Sharing Contract (PSC). Imported LNG pricing is governed by the Sale and Purchase Agreement (SPA) between sellers and buyers.
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APM gas is allocated at regulated prices, typically below market rates, to CGD companies (for domestic cooking gas and CNG for vehicles) and power generation. The aim is to ensure affordability in these priority sectors.
However, APM gas availability has been slashed from 65–70% of requirements last month to just 40–45%, compared to 154% in FY21. As a result, CGD companies are forced to turn to costlier alternatives like spot LNG, HPHT fields, and new domestic sources, significantly raising raw material costs and pressuring profitability.
These allocation cuts will have a lopsided impact on the companies with IGL and MGL having a more pronounced impact as both have over 80% of their volumes in priority sectors (CNG (Compressed Natural Gas) and household PNG (Piped Natural Gas)).
“The revised domestic gas allocation…will have an adverse impact on profitability of the Company,” Indraprastha Gas said in a regulatory filing on Monday.
Gujarat Gas, however, is comparatively better positioned because it has less than 40% exposure to priority sectors and a focus on industrial clients.
Post the festive season, these companies were reportedly planning to hike prices, to offset their margin losses due to allocation cuts. However, no action has been taken so far. Yet, the additional reduction will further worsen margin prospects, leaving the sector's growth outlook uncertain.
As a result, while the CGD companies would reportedly need to raise prices by 10%, analysts believe steep hikes will be unlikely due to the upcoming state elections.