City gas distribution (CGD) players Indraprastha Gas and Mahanagar Gas shares cracked up to 14 percent after announcing that the priority gas allocation of gas to the CGDs is being cut sharply to ~50 percent, from levels of ~70 percent currently.
While there has already been a sustained reduction in the extent of APM allocation from >85 percent at beginning of FY24 to >72 percent now, this reduction is the biggest single cut in such allocations.
The managements of both companies expect an adverse impact on their profitability and are in discussions with key stakeholders to minimise the impact.
At 10.30 am, shares of major city gas suppliers were under pressure. Mahanagar Gas stock was quoting Rs 1,509.95 on the NSE, while IGL shares tanked 11.4 percent to Rs 447.2 per share.
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With rising dependence on market-linked gas, CGD players will be forced to defend margins at the expense of volume growth. This could trigger a derating of the sector, noted Jefferies.
CGD companies are likely to be forced to pass on the majority (if not all) of the hike in gas cost to end-consumers as otherwise it will lead to a huge hit on their margins. Hiking CNG price by Rs 3.5-5/kg or 5-7 percent is likely to further reduce the competitiveness of CNG, noted JM Financial.
The brokerage added that this is likely to further erode pricing power in the CNG business and pose significant downside risk to volume growth and margins. JM Financial cut its rating on IGL and MGL to 'sell', with a target price of Rs 435 and Rs 1,400 each, implying a downside from current levels.
"We still see upside in MGL and maintain our positive view on the stock amid strong volume growth, while retaining our negative view on IGL. In the near term, the upcoming Maharashtra election may delay MGL's pricing action, but with a history of pricing proactiveness, the adverse profitability impact should be transitory," said Emkay Global.
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