IGL, MGL shares sink up to 19%; Gujarat Gas stock down 6%; here's why

City gas distributor (CGD) stocks Indraprastha Gas Ltd (IGL) and Mahanagar Gas Ltd (MGL) sank up to 19 per cent in Monday's trade, while shares of Gujarat Gas declined 6 per cent after a reduction in APM gas allotment for the second time in a month.

Analysts noted that IGL could take a big hit as its share of priority sector volumes is high. IGL also has relatively lower base margins than MGL. Gujarat Gas, due to its focus on the industrial segment, has lower share of priority sector volumes at less than 40 per cent. This is against over 80 per cent share for both IGL and MGL. Besides, Gujarat Gas' sourcing is largely made up of spot and contracted LNG, giving it a leg up over other CGDs in replacing APM shortfall, likely limiting earnings downside from deallocation, marketmen said.

"Following the cumulative cuts in APM gas allocation of about 40 per cent each to CGD entities, we have cut estimates and DCF-based target price for IGL, MGL and GGL and downgraded them to 'Sell' on a tactical basis, said Nirmal Bang Institutional Equities.

IGL shares dived 18.89 per cent to Rs 329.25 on BSE. The Mahanagar Gas stock were down 13.26 to Rs 1,137.50. Gujarat Gas shares fell 6.03 per cent to hit a low of Rs 456.70.

Oil & gas analysts said while the structural decline in APM allocation for the CGD sector was inevitable, this significant 35 per cent cut in allocation in the past one month with no proper policy communication is a clear negative.

"Surprisingly, the government has cut cheap $6.5/mmBtu APM gas for CGD sector by a further 18 per cent after a similar event last month. Not only does this deal a severe blow, but now market is likely to build in more cuts," said Nuvama Institutional Equities.

Nuvama said 18–20 per cent reduction in APM gas allocation to CGDs, over and above the 13–14 per cent de-allocation announced last month, is a big blow to the structural growth of the sector.

"While a gradual APM de-allocation was likely over the long-term, the pace of de-allocation has been faster than expected by the Street. With APM allocation falling to 30–35 per cent for the sector, assuming the shortfall being bridged by higher New Well Gas (NWG) price of $8–9/MMBtu and balance by spot LNG at $14/mmBtu, we expect overall input gas cost to rise by $2–6/scm, which could affect CGDs FY26E Ebitda by 43–63 per cent in the absence of price hikes," it said.

JPMorgan is said to have downgrade MGL stock to 'Neutral' from 'Ovweweight' with a revised target price of Rs 1,300. It downgraded IGL TO 'Underweight' while slashing its target price to Rs 343. Companies would have to scramble for alternate gas at higher costs, which will affect margins further, it suggested.

Jefferies has cut MGL's target price to Rs 1,130 and IGL's price to Rs 295 from Rs 390. Cheap domestic gas will soon be taken away fully, it said. Assuming no excise duty relief, estimated APM gas allocation cuts could necessitate price hike of over Rs7 per kg, a challenge to fully pass-through without impacting economics of CNG, Citi reportedly said.

CGD companies post Q2FY25 highlighted 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.

Media reports quoting MOPNG officials have stated GoI asking for cost breakup, highlighting the high margins of CGDs versus OMCs, before green signaling them for retail price hikes (at least Rs 4.5-5/kg required), which could add to negative sentiments, Emkay Global said.

In the absence of price hikes, Emkay Global estimated a 46 per cent/25 per cent hit on IGL/MGL’s Ebitda per scm against Q2 run-rate which is Rs 3.5/8 and against the latest guidance of Rs 6-7/10-12.

"Excise duty alignment between CNG, petrol and diesel can be done to avoid CNG price hikes amid a $70-75 per barrel oil price scenario, if the current margins and return ratios of CGDs are to be protected. Due to the lack of clarity, we now assume a 14 per cent RoE model for both IGL/MGL and cut our EPS estimates by 17 per cent/25 per cent," it said.

This brokerage has cut targets for IGL by 18 per cent and MGL by 26 per cent to arrive at fresh target prices of Rs 385 and 1,400m respectively.

Nuvama has cut its FY25–27 Ebitda estimates by 4–22 per cent and target prices by 23–41 per cent. It has downgraded IGL and MGL to ‘Reduce’ and Gujarat Gas to ‘Hold’.

Emkay said it would await further commentary from companies and the government to assume a less conservative scenario.