City gas distribution (CGD) firms have seen a turbulent ride on the bourses over the past few weeks, following the APM de-allocation in two consecutive months. However, the stocks have partially recovered losses from November lows.
According to Nuvama Institutional Equities, the markets are ignoring an imminent profit plunge while pricing in an implementation of GST on natural gas.
In November, the government cut the the Administered Price Mechanism (APM) allocation to CGD players by 20 percent for the second month in a row. A reduced allocation in the APM means that the Centre has cut the supply of low-priced natural gas from old fields to city gas retailers. As a result, the CGDs will have to look for alternative options to bridge the gap in the input gas, such as New Well Gas or spot LNG, which are more expensive.
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However, following the ~45 percent fall in share prices of these players from September to November, IGL, MGL and Gujarat Gas have rebounded 22 percent, 10 percent and 12 percent, respectively, from November lows. "We argue fundamentals are unsupportive as markets are ignoring an imminent profit plunge," added the brokerage.
Currently, natural gas does not fall under the GST framework. Instead, gas sees a slew of taxes: state VAT, central sales tax, and central excise duty. The gas value chain has many input and output taxes, especially as a result of the difference in taxation between states.
A GST levy on natural gas shall result in cost decreases as non-refundable taxes shall be eliminated by availability of input tax credit (ITC) for GST paid to vendors while also removing the cascading impact of indirect taxes. However, a majority of said benefits shall have to be passed on to consumers in accordance with the antiprofiteering rules under GST laws, said Nuvama.
If GST on CNG is rolled out at the 12 percent mark, there could be a 9-11 percent upside potential to FY26E EBITDA. However, the timing of GST rollout is uncertain given the impasse on negotiations with states.
The inclusion of gas in GST ambit is unlikely to be on the agenda of upcoming 55th GST Council meet, scheduled on December 21, 2024.
The brokerage reiterated its bearish rating on CGDs as near-term fundamentals are weak. IGL and MGL both have a 'reduce' rating, while Nuvama maintained its 'hold' call on Gujarat Gas.
Margins are likely to be severely affected on account of APM de-allocation for priority sector
volumes with the share of expensive gas surging in the gas sourcing mix. Gujarat Gas is likely to be least affected due to a lower sales share of priority sector mix.
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