Shares of Indraprastha Gas Ltd (IGL), Mahanagar Gas Ltd (MGL) and Gujarat Gas Ltd have rebounded 22 per cent, 10 per cent and 12 per cent, respectively, from November lows but Nuvama Institutional Equities is cautious. The three stocks gained despite post-twin APM de-allocation, as Nuvama believes the market is pricing in an elusive GST rollout for natural gas while ignoring an imminent profit plunge. It argues the fundamentals are unsupportive.
Nuvama said while GST on natural gas is expected to improve earnings by availability of input tax credit (ITC) for GST paid to vendors and remove the cascading impact of taxes, benefits are uncertain.
"We reckon 9–11 per cent upside potential to FY26E Ebitda on GST rollout with majority of benefits required to be passed on to consumers according to GST anti-profiteering rules and regulations. Furthermore, the timing of GST rollout is uncertain given the impasse on negotiations with states," it said.
Nuvama said following the twin APM de-allocation for city gas distributors (CGDs), gas costs may increase by Rs 1–3.5/scm for its coverage CGDs, assuming the gas shortfall is covered equally by New Well Gas and spot LNG.
"CNG price hikes during the quarter (MGL: Rs 2 per kg; IGL: Rs 1.5–4 per kg; GGL: Rs 1.5 per kg) are unsupportive of CGDs’ margin profiles. Moreover, IGL has not taken price hikes in the NCT of Delhi (70 per cent of volumes) and is unlikely to raise prices ahead of the assembly elections in Feb-25. After factoring in the announced price hikes, we estimate a reduction in Ebitda margins by Rs 1–3/scm, resulting in a 17–44 per cent sequential decline in Q3FY25E Ebitda margin," Nuvama said.
Furthermore, the brokerage said the March quarter is likely to be affected as CGDs had indicated firming up long-term supply contracts to replace APM shortfall in Feb-25 during their Q2FY25 earnings conference calls. To be sure, additional CNG price hikes shall partially offset margin impact, but volume growth is likely to suffer given CNG’s reduced competitiveness to petrol and diesel, Nuvama said.
"We reiterate our rating on CGDs as near-term fundamentals are weak. 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. GGL is likely to be least affected due to a lower sales share of priority sector mix," it said.
Nuvama said IGL, its top ‘Reduce’, has rallied the most despite the most severe input cost impact. It sees Gujarat Gas to be least impacted.