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  5. IGL, MGL: City gas distribution companies' shares tumble up to 15%; sector could see derating; here is why

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IGL, MGL: City gas distribution companies' shares tumble up to 15%; sector could see derating; here is why

Upstox
By Upstox News Desk

3 min read | Updated on October 18, 2024, 13:12 IST

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SUMMARY

At the time of writing this report, IGL shares were trading around 10% lower at ₹454.55 apiece on the BSE, while MGL shares were down nearly 12% at ₹1,554.05 apiece on the BSE. Gujarat Gas shares were trading at ₹563.60 apiece, down over 1%.

Stock list

MGL
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IGL
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GUJGASLTD
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Buying costly imported gas to make up for the shortfall should result in a hike in the CNG price

Buying costly imported gas to make up for the shortfall should result in a hike in the CNG price

IGL, MGL share price: Shares of city gas distribution companies such as Indraprastha Gas (IGL) and Mahanagar Gas (MGL) tumbled up to 15% in the morning trade on the BSE on Friday, October 18, after news surfaced that the government has slashed by up to a fifth the supplies of cheaper gas to city gas entities that retail CNG to automobiles, increasing their dependence on costly imported fuel.

Buying costly imported gas to make up for the shortfall should result in a hike in the CNG price, but given the ensuing assembly elections in Maharashtra, that may be put off for now.

Indraprastha Gas and Mahanagar Gas said in regulatory filings that supplies of domestically produced gas, which were available at a capped rate of half of the imported price, have been cut, PTI reported on Thursday. 

At the time of writing this report, IGL shares were trading around 10% lower at ₹454.55 apiece on the BSE, while MGL shares were down nearly 12% at ₹1,554.05 apiece on the BSE. Gujarat Gas shares were trading at ₹563.60 apiece, down over 1%.

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"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 per million British thermal unit). Based on communication received by the company from GAIL (India) Ltd (the nodal agency for domestic gas allocation), this is to inform you that there has been a major reduction in domestic gas allocation to the company effective from October 16, 2024," IGL said in a filing.

The revised domestic gas allocation to IGL is about 21% less than the previous allocation, "which will have an adverse impact on the profitability of the company," it said, adding it is in discussions with key stakeholders to minimise the impact.

Separately, MGL said as per Policy Guideline dated August 10, 2022, issued by the Ministry of Petroleum and Natural Gas, domestically produced Administrative Price Mechanisms (APM) natural gas is to be allocated to city gas distribution (CGD) companies for priority segments, specifically domestic piped natural gas and CNG (transport).

According to a report by CNBC-TV 18, global brokerage firm Jefferies noted that the government has reallocated 12-15% of the APM gas designated for city gas distribution companies.

This shortfall will need to be compensated by purchasing spot or short-term LNG, which may result in a reduction of ₹3, ₹3, and ₹2.3 per scm in EBITDA margins for IGL, MGL, and Gujarat Gas, respectively.

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As CGD companies' reliance on market-linked gas reaches 50% and continues to increase, they may have to prioritise maintaining margins over pursuing volume growth. This situation could lead to a derating of the sector, the brokerage said.

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