City gas distribution (CGD) companies took a beating in early trade on April 16, after the Centre decided to cut its priority gas allocation (APM) to Mahanagar Gas, Indraprastha Gas and Adani Total Gas.
APM gas is sold at cheaper price to the CGD players to ensure essential services such as domestic piped natural gas (PNG) and CNG receive gas at lower costs.
The Administered Price Mechanism gas allocation was trimmed between 15 to 20 percent for the companies, which reduced their total allocation to around 40 percent, from the current 51 percent.
At 10.20 am, shares of Mahanagar Gas were quoting Rs 1,249.8, down five percent, Adani Total Gas was lower by 0.9 percent at Rs 605, while Indraprastha Gas shares tumbled three percent to Rs 173.78 apiece.
Follow our live blog to catch all the updates
The cut in APM gas allocation translates into higher input costs for CGD companies, which could result in another CNG price hike by the companies. “The allocation cut is a surprise as it was to fall over a period as CGD volume growth takes place. The CGDs will further take some price hikes to cover this,” said Harshraj Aggarwal, Executive Vice President at Yes Securities.
With rising dependence on market-linked gas, CGD players will be forced to defend margins at the expense of volume growth, noted Jefferies. All the three companies mentioned in their respective exchange filings that the move would have an adverse impact on profitability.
"This lower allocation of APM gas is being replaced with New Well Gas (NWG) as communicated by the Nodal Agency. However, the higher priced NWG and lower APM gas allocation, will have an adverse impact on the profitability of the Company. The Company is exploring all measures to mitigate the impact," said Adani Total Gas.
In recent months, the government had to cut the allocation of APM gas to CGD companies due to depleting domestic production. In October, the government reduced APM gas allocation to the CNG segment from 68 percent to 50.75 percent and further to 37 percent in November.
CGD companies had to rely on costlier sourcing options, including High Pressure High Temperature (HPHT) and spot gas, which ate into their margins.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
