From Mahanagar Gas to Indraprastha Gas: Why are City Gas Distribution Stocks Falling?

The gas transmission industry in India has seen remarkable growth, driven by the government's push to expand pipeline networks and increase natural gas usage as part of the country's cleaner energy goals.

Within this sector, city gas distribution (CGD) has become increasingly important, ensuring the supply of gas to households, industries, and vehicles. Rapid urbanisation and the growing demand for environmentally friendly fuels have further boosted this segment.

Top players such as Indraprastha Gas (IGL), Mahanagar Gas (MGL), and Gujarat Gas have rapidly expanded their networks, benefiting from the rising demand for PNG (piped natural gas) and CNG (compressed natural gas).

The Ministry has laid major focus on extending CGD networks to 407 districts, with the aim of covering over 70% of the population. This expansion will not only provide cleaner cooking fuel to homes and industries but also support vehicles with CNG. Over Rs 1.2 trillion (tn) in investments is expected in the coming decade to sustain this growth, drawing strong investor interest in recent years.

Despite this progress, the sector is now facing unexpected challenges, causing investors to reassess their expectations. The impact is immediate, with shares of leading CGD companies witnessing steep declines.

Companies like Indraprastha Gas and Mahanagar Gas saw a sharp fall of 10-12% within just a day, reflecting market anxiety. Let's take a look at the details of the troubling news to understand why CGD stocks are nosediving.

Government Cuts in Gas Allocation Triggers a Sharp Fall

The Indian government recently announced a major reduction in the priority allocation of domestically produced administered price mechanism (APM) gas to city gas distribution (CGD) companies.

According to policy guidelines from the Ministry of Petroleum and Natural Gas, APM gas is provided to CGD companies for essential segments like domestic PNG and CNG (transport). However, based on new instructions, CGD companies will now receive gas only according to the available supply allocated to GAIL (India), the nodal agency responsible for domestic gas distribution.

Both IGL and MGL confirmed that they received communication from GAIL regarding the reduction, which took effect from 16 October 2024.

As per the revised policy, gas allocated for the CNG (transport) segment has been cut by approximately 20% compared to earlier levels. This is the most significant single cut seen so far, with previous allocations already declining throughout FY24-from more than 85% to around 72%.

The sharp reduction is expected to impact profitability, as CGD companies will have to source more expensive gas from alternative suppliers to meet demand. Both IGL and MGL have warned that the lower allocation will hurt their margins.

They are in discussions with stakeholders to minimise the damage, but the impact on future earnings has made investors uneasy.

Investor sentiment has been hit hard by the sudden policy shift, raising doubts about the long-term growth prospects of the CGD sector. The fall in stock prices reflects market fears that the profitability of these companies could remain under pressure unless the allocation policy is revised or demand conditions improve.

What Next?

The recent reduction in domestic gas allocation has forced city gas distribution (CGD) companies to reassess their strategies.

With only half of their gas requirements now met through lower-cost domestic supply, they will need to import the remaining 50% at prices 50-60% higher. This situation creates a dilemma-either raise CNG and PNG prices to maintain margins or absorb the higher costs, which would hurt profits.

If these companies increase prices, demand could decline, impacting volumes. Calculations suggest that if prices are not raised, earnings could fall significantly for all CDG companies. However, raising prices may be difficult due to upcoming assembly elections, which could limit their ability to pass on higher costs to consumers.

To manage the shortfall, CGD companies will need to rely more on spot or short-term LNG, which is more expensive. This shift could lower EBITDA margins, increasing pressure on profitability.

As reliance on market-linked gas grows, these companies may prioritise protecting margins over volume growth. This shift in focus may also affect investor sentiment, leading to a potential derating of the sector.

In the longer term, these companies will need to adopt strategies to mitigate the impact of volatile gas prices. They may explore optimising their sourcing, expanding infrastructure, or diversifying services to improve efficiency.

However, until domestic gas allocation stabilises, their future growth plans and profitability will remain under pressure.

For a detailed outlook of individual companies like MGL and IGL, check out - Top 5 Gas Distribution Stocks in India.

For a sector overview, read our energy sector report.

And to know what's moving the Indian stock markets today, check out the most recent share market updates here.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...