City gas distribution companies (CGDs) shares crashed 20 percent in the morning session on November 18 after the government has 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.
IGL and MGL have reported a 20 percent and 18 percent additional cuts, respectively, over the ~20 percent cut which was announced earlier on October 16, while Adani Total Gas has indicated a 13 percent cut.
"The revised domestic gas allocation to Company is approximately 20 percent lesser than previous allocation which will have an adverse impact on profitability of the Company," IGL said.
Confirming the "adverse" profitability hit, IGL said it is exploring all options to address the issue. IGL had recently said that it is in "strong discussions" for an increase in the price of gas, and also to pass it on to customers.
At 10.20 am, shares of IGL cracked 20 percent to quote Rs 324.7, while MGL stock was around Rs 1,150.75 on the NSE, down 12 percent. Gujarat Gas shares sank over 5.8 percent to trade at Rs 458 apiece.
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In October, when the first APM cut was undertaken, shares of IGL and MGL saw heavy selling pressure on the bourses. Following the host of downgrades and pessimism, the negative sentiment is expected to continue as CGDs share that profitability will be impacted.
According to various brokerages, the steep pace of the cuts, coupled with no policy communication poses as a sharp negative for the city gas distribution companies. Based on the previous communication, following the sharp cut in October, the further pace of cuts was expected to be more moderate and tapered.
"CGD companies highlighted that prices would be hiked post-festive season to partially recover lost margins. However, no action has been seen so far and with this additional cut, the margin outlook has deteriorated with no near-term clarity on the course of action," said Emkay Global.
"The implied non-APM blended gas price for the companies were $13-14/mmbtu, hence, replacement by such gases would impact blended EBITDA/scm by Rs 2.7-3 and necessitate at least an Rs 4.5-4.8/kg hike," added the brokerage.
According to Nuvama Institutional Equities, with no price hikes and a rising costs of input gas for the companies, the EBITDA in FY26 could take a 43–63 percent hit. The domestic broking firm downgraded IGL and MGL to 'reduce', while giving Gujarat Gas a 'hold' call.
International brokerage Jefferies downgraded MGL and IGL to 'underperform' with target prices cut to Rs 1,130 and Rs 295 per share, respectively. Lower APM allocation suggests that cheap domestic gas will soon be completely taken away. The brokerage cut the EPS estimates on MGL, IGL and Gujarat Gas by 31 percent, 27 percent and 19 percent, respectively.
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