City gas distributors like Mahanagar Gas, Indraprastha Gas and Gujarat Gas among others are set to take a big hit on their earnings with the government cutting the gas allocation under the administrative price mechanism for the second time in as many months.
The move, which could weaken sector growth prospects, led to a sharp sell-off in shares of these companies on Monday. Shares of Indraprastha Gas tumbled over 18 per cent, Mahanagar Gas slumped 14 per cent and Gujarat Gas slipped around 7 per cent. Adani Total Gas too fell over 2.5 per cent.
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According to policy guidelines issued by the Ministry of Petroleum and Natural Gas, domestically produced Administrative Price Mechanisms (APM) natural gas is to be provided to city gas distribution companies for priority segments, specifically domestic PNG (piped natural gas) and CNG (compressed natural gas) (transport). As per the policy, the supply of domestic gas to city gas distributors will be made only up to the quantity available and allocated to GAIL India, the nodal agency responsible for domestic gas distribution.
According to Indraprastha Gas, effective November 16, there has been a further reduction in domestic gas allocation to the company and the revised allocation is about 20 per cent less than the previous allocation. This will have an "adverse impact" on the profitability of the company, it said.
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Similarly, Mahanagar Gas also said that the allocation of APM gas to the company had reduced by 18 per cent, effective November 16, compared with October 16 and will impact profits. For Adani Total Gas, the reduction in APM Gas allocation is around 13 per cent.
The latest round of APM gas allocation is on top of around 20 per cent cuts that were announced on October 16, note analysts, with some saying the move indicates that the government is slowly moving the entire gas supply towards more market-linked pricing.
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Meanwhile, companies are exploring other measures to bridge the shortfall to ensure consistent gas supply continues to consumers.
Mahanagar Gas said it is "exploring options of sourcing gas through domestically produced High-Pressure High Temperature (HPHT) gas, new well/ well intervention gas from ONGC and benchmark-linked long-term gas contracts, so as to continue to provide gas to its customers with price stability."
But, consumers may also have to be ready for a round of price hikes.
"The company is examining the current situation and shall calibrate the retail prices to end consumers to mitigate the impact of lower allocation while it will continue to provide uninterrupted gas to its consumers," said Adani Total Gas.
Probal Sen of ICICI Securities though noted that the city gas distributors were yet to take the required price hike of Rs 4.4-6.2 per kilo in the CNG segment, following the previous cut. Consequently, it reflected in earnings per share reductions of 9.4 per cent, 18.4 per cent and 6.4 per cent for the 2025-26 financial year for Indraprastha Gas, Mahanagar Gas and Gujarat Gas respectively following their September quarter earnings, he noted.
"Now however, a further additional price hike of Rs 2.5-2.8/ kg could be required to maintain margins assuming no reduction in costs from some other source," said Sen.
It would be difficult though for companies to raise prices by Rs 8-9 per kg in one go, as such a sharp hike risks impacting volume growth. But, only a partial increase in prices would also pressure margins.
Sabri Hazarika, research analyst at Emkay Global Financial Services noted that while structural decline in APM allocation for the city gas distribution sector is inevitable, the significant 35 per cent cut in the last month with no proper policy communication is a negative. With no clarity on price hikes, the latest cut in APM gas allocation will further deteriorate margins, he said.
"City gas distribution companies highlighted post-second quarter FY2025 that the October cut was a major one with gradual cuts likely hereon and 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," stressed Hazarika.
In the absence of price hikes, he estimates a 46 per cent and 25 per cent hit on Indraprastha Gas, Mahanagar Gas’ EBITDA (earnings before interest, taxes depreciation and amortization) per SCM (standard cubic meter), compared with the second quarter run-rate, which is Rs 3.5 and Rs 8 and against the latest guidance of Rs 6-7 and Rs 10-12, he explained.
What's comforting according to Sen is that LNG prices are likely to remain moderate with 170-190 million tonnes of global liquefaction capacity addition over the next 4-5 years.
Currently, there is a 35-45 per cent price differential between CNG and petrol and diesel. If petrol and diesel prices are cut in the backdrop of lower oil prices ($70-75 per barrel range), then that would disrupt CNG economics. A potential cut in excise on CNG could offset the margin pressures due to the APM allocation cut, note analysts.
The Rs 9-10/kg of excise in CNG (14.4 per cent rate) can be lowered, which coupled with hikes in petrol-diesel specific excise could provide respite to margins of city gas distributors, said Hazarika.
"A halving of CNG excise to 7.2 per cent can offset the entire margin hit from reduced allocation," he added.
