CGD companies to be hit as govt cuts cheaper gas allocation for CNG by 20%

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The performance of city gas distribution (CGD) companies is expected to be hit after the government introduced a significant cut in the allocation of domestic Administered Pricing Mechanism (APM) gas to the gas players.

State-run Indraprastha Gas Limited (IGL) and Mahanagar Gas Limited (MGL) said that the reduction in APM gas allocation would have an “adverse impact” on their profitability.

On October 17, the Ministry of Petroleum and Natural Gas (MOPNG) reduced allocation of APM gas for compressed natural gas (CNG) by 20 percent compared to the previous average quarterly allocation. CNG constitutes 75 percent of volumes of CGD companies like IGL and MGL.

“The above cut is likely to result in ~4mmscmd of cheap USD 6.5/mmbtu APM gas being replaced with expensive gas costing USD10-14/mmbtu (like domestic HPHT gas, new well/well intervention from ONGC and LNG imports),” said JM Financial Institutional Securities Limited in a note.

“This is likely to result in weighted average gas cost for the CNG business rising by $0.7-1/mmbtu, which implies a CNG price hike of INR 3.5-5/kg or 5-7%. This is likely to further erode pricing power in the CNG business and pose a risk to volume growth and margins,” it added.

APM gas is sold at cheaper price to the CGD players in the country to ensure essential services such as domestic piped natural gas (PNG) and CNG receive gas at lower costs. According to government data, APM gas is sold at $6.5 per mmBtu while HPHT costs $10.16 per mmBtu.

On October 18, IGL share price nosedived 10.26 percent while Mahanagar Gas shares declined 9.94 percent.

“Based on Q1FY25 numbers for IGL/MGL, out of 6.5/2.8mmscmd of CNG sales, 3.7/1.7mmscmd was APM and after this cut the same reduces to 3/1.4mmscmd. If this is replaced by an equal mix of NWG and spot LNG, CNG margins would be hit by ~Rs2/scm, necessitating a Rs3-3.5/kg hike in RSP. Overall book margin hit would be Rs1.4-1.5/scm which is 21%/12% of Q1 EBITDA/scm for IGL/MGL. Overall, we see valuations being impacted similarly, though RSP hikes could offset the same,” said Emkay Global Financial Services Ltd.

The reduction in APM allocation would have to be replaced by more expensive HPHT gas or LNG, which could force gas players to increase CNG prices for customers.

In order to maintain contribution margins at existing levels, CNG prices would have to be increased by about Rs 5-5.5 per kg, said Girish Kadam, Senior Vice President & Group Head - Corporate Ratings, ICRA Limited.

“The expected price rise may result in slower growth in the CNG vehicle registrations, which have been the key driver of CNG sales volume for the sector,” said Kadam. State-run Indraprastha Gas said the company is in discussion with key stakeholders to minimise the impact.