IGL, MGL, Gujarat Gas shares: Target prices for CGD stocks as selloff likely on APM gas allocation cut

Shares of city gas distributors Indraprastha Gas Ltd (IGL), Mahanagar Gas Ltd (MGL) and Gujarat Gas Ltd look set for another round of selloff after the nodal agency GAIL cut APM (Administered Pricing Mechanism) gas allotment for the second time in a month. Analysts said while the structural decline in APM allocation for the CGD sector was inevitable, the significant 35 per cent cut in the last one month with no proper policy communication is a clear negative.

IGL is seen taking the biggest hit due to high share of priority sector volumes and relatively lower base margins than MGL. In the case of Gujarat Gas, due to its focus on the industrial segment, its share of priority sector volumes is lower at less than 40 per cent compared with over 80 per cent for 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, analysts said.

"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.

MGL shares have plunged 17 per cent in the past one. Gujarat Gas has fallen 13.46 per cent while IGL is down 10 per cent during the same period.

The brokerage 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.

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.