This was the second straight month in a row that the gas allocation has been cut.
The total Administered Price Mechanism (APM) gas availability for these companies now stands between 40% to 45% from 65% to 70% a month earlier. The allocation figure in financial year 2021 stood at 154%.
So What Would This Mean?
Another cut means that gas sourcing will now require a combination of spot LNG, High Pressure High Temperature (HGPHT), gas from new fields, as well as the APM gas.
This would increase the cost of raw material for the City Gas Distribution companies and 50% of the sourcing will have to be done via market-linked prices.
Does This Warrant Further Price Hikes?
Companies will now have to take price hikes of 10% to nullify the impact of higher costs. However, analysts do not see a steep price hike due to the state elections that are about to get underway soon and those that are coming up.
What Do The Analysts Say?
Brokerage firm Jefferies wrote in its note that it is baking in the APM gas allocation falling to nearly nil by the middle of calendar year 2025.
It has lowered the financial year 2026 Earnings per Share (EPS) estimates for Mahanagar Gas, Indraprastha Gas and Gujarat Gas by 31%, 27% and 19% respectively.
As a result, it has downgraded Mahanagar Gas to “underperform” from its earlier rating of “buy” and cut its price target to ₹1,130, while IGL has been downgraded to “underperform” from its earlier rating of “hold” and also cut its price target to ₹295 from ₹330 earalier.
JPMorgan too has downgraded Mahanagar Gas to “neutral” from “overweight” and cut its price target of ₹1,300 and downgraded IGL to “underweight” as well and cut its price target to ₹343.
CLSA believes that without any price hikes, this move could result in a hit of 30% to 45% on unit EBITDA margins of IGL and MGL.
Both IGL and MGL are locked in a 10% lower circuit at ₹365.25 and ₹1,181.4, respectively. Shares of Gujarat Gas are down 3.5% at ₹469.05.
As of Thursday’s closing Shares of IGL were down 10% in the last one month, while those of MGL and Gujarat Gas had declined 17% and 13% respectively over the same time period.
