City Gas Distribution (CGD) stocks—including Indraprastha Gas (IGL), Mahanagar Gas (MAHGL), and Gujarat Gas—have dropped between 23% and 43% over the past three months due to several challenges. These issues include a significant reduction in the availability of the cheapest gas under the domestic administered price mechanism (APM), regulatory plans for third-party access in existing areas, and the inability to transfer rising gas costs to consumers. In a recent report, brokerage Elara Capital raised concerns about whether this downturn signals the end for CGD stocks.
The ongoing concerns regarding compressed natural gas (CNG) demand could worsen if the low crude oil prices persist. This situation might lead to reductions in gasoline prices, making CNG less appealing than gasoline. Such a shift could negatively impact future growth and profit margins in the sector, according to the brokerage’s analysis.
CGD companies may experience a continued decline in margins and slow volume growth. According to brokerage estimates, APM gas allocations are expected to decrease to approximately 25% over the next 2-3 years. This decline is attributed to an 8% year-over-year drop in gas production from ONGC’s older fields, along with a projected 15% growth in CNG volumes outside the three listed CGDs.
“So, we cut the target prices of Indraprastha Gas, Mahanagar Gas, and Gujarat Gas by 30- 42% and downgrade Indraprastha Gas to Sell (from Accumulate), Mahanagar Gas to Reduce (from Buy) and Gujarat Gas to Reduce (from Buy),” the brokerage said.
Going forward – Three crucial factors to look in detail
APM gas allocation
The brokerage estimates that the allocation to APM gas will decrease by 15-20% in the future, dropping from the current approximately 45% to around 25%. This change suggests that CNG costs may experience significant volatility ahead, as these costs will be influenced by international crude oil and LNG prices.
CNG cost
Going forward, according to the gas pricing policy for domestic gas, CGDs will need to pay approximately a 40% premium over the APM gas prices, assuming crude oil prices are at USD 75 per barrel, for gas sourced from new wells operated by ONGC. This situation suggests a 7-8% annual replacement of APM gas with gas from these new wells, which is likely to lead to an increase of at least ₹1-2 per kilogram in the raw material cost of CNG.
Third-party access
Since the marketing exclusivity has expired, the Petroleum and Natural Gas Regulatory Board (PNGRB) recently invited several firms, including Indraprastha Gas, Mahanagar Gas, and Gujarat Gas, to share their views on declaring their compressed natural gas (CNG) networks as common carriers. However, the Honorable Delhi High Court ruled that any decision made during this consultative process will not be implemented by the PNGRB if it is unfavourable. Further action on the matter will proceed only after directives from the Honorable High Court.
“If the worst-case scenario of an adverse decision by the PNGRB and the High Court materializes , given the PNGRB’s CY20 guidelines that 20% network capacity should be available as a common carrier, the earnings of CGD entities would be hit by ~20% due to potential volume loss from competition,” the brokerage said.
Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decision.
