Shares of Mahanagar Gas (MGL) and Indraprastha Gas (IGL) saw a steep decline of up to 15% on October 18, 2024, following a major reduction in priority gas allocations. The City Gas Distribution (CGD) companies now face allocations of 50%, down from the previous 70%, potentially causing a significant impact on their margins.
What’s Happening? ⚠️
The sharp cut in APM (Administered Price Mechanism) gas allocations is the largest in recent times, as allocation levels have dropped from 85% at the start of FY24 to 50% now. This reduction is expected to force CGD companies to pass on higher gas costs to consumers, or else face severe margin pressure.
- Mahanagar Gas shares fell to ₹1,509.95, down 14%.
- Indraprastha Gas shares plummeted 11.4%, trading at ₹447.2.
Impact on Profitability 💸
Both companies are bracing for a hit on profitability and are in talks with key stakeholders to minimize the damage. However, they may be forced to hike CNG prices by ₹3.5-5/kg (or 5-7%) to cushion the rising costs, potentially affecting CNG’s competitiveness in the market.
- Jefferies predicts CGD players will struggle to defend margins while maintaining volume growth, which could lead to a sector-wide derating.
- JM Financial downgraded both MGL and IGL to ‘sell,’ citing downside risks to both margins and volume growth.
What’s Next? 🔮
While Emkay Global maintains a positive view on MGL due to its historical pricing proactiveness and strong volume growth, it remains cautious about IGL. The upcoming Maharashtra elections may delay pricing actions for MGL, but the profitability hit may only be temporary.
Both stocks remain under pressure, with investors closely watching for pricing adjustments and further developments in gas allocations.