Why MGL, IGL shares plunged 12-15% but Gujarat Gas stock stayed unfazed

Shares of Indraprastha Gas Ltd (IGL) and Mahanagar Gas Ltd (MGL) plunged up to 15 per cent in Friday's trade after the two city gas distributors  confirmed a 20 per cent ad hoc reduction in allocation of cheap APM gas for the CNG segment with effect from October 16. Gujarat Gas also fell, but the losses were limited to 2 per cent.

The managements of MGL and IGL expect an adverse impact on their profitability and are in discussions with key stakeholders to minimise the impact. Shares of MGL plunged 14.58 per cent to hit a low of Rs 1,503.80 on BSE. IGL tumbled 12.88 per cent to Rs 439.40 level. Gujarat Gas was down 1.39 per cent at Rs 562.10.

The two stocks, JM Financial said,  also fell amid the ongoing reduction in proportion of APM gas allocation by 6-8 per cent per annum for CNG and domestic PNG segment, as the entire growth is being met via expensive non-APM gas sources.

"The latest cut is likely to result in 4 mmscmd of cheap $6.5 per mmBtu APM gas being replaced with expensive gas costing $10-14/mmBtu. This is likely to result in weighted average gas cost for the CNG business rising by $0.7-1/mmBtu, which implies a CNG price hike of Rs 3.5-5/kg or 5-7 per cent. This is likely to further erode pricing power in the CNG business and pose a risk to volume growth and margins," JM Financial said.

Further, it’s a significant de-rating event for CNG-dominated CGD companies like IGL and MGL -- as CNG constitutes 75 per cent of their volumes. It significantly raises uncertainty on the government’s future policy measures.

"Hence, we reduce IGL and MGL’s FY25-27 Ebitda by 10-13 per cent and cut target price to Rs 435 for IGL and to Rs 1,400 for MGL; we downgrade both IGL and MGL to Sell. However, we maintain Buy on Gujarat Gas (revised target price of Rs 650) as 60 per cent of its volume comes from the industrial segment," it said.

Antique Stock Broking said the probability of CGDs getting impacted is likely to be a structural outcome. The fresh development, over five years, would imply APM allocation would be down to zero, unless a clear policy directive were to be issued to exclude CGDs from the allocation cut, it said.

While this one-time cut is only marginally negative, a structural cut is a huge negative for the CGD business, the brokerage added, as it cut target multiple by 20 per cent and downgrade IGL and MGL to Sell, and Gujarat Gas to 'Hold'.

MGL would be the least impacted among CGDs given its higher proportion of industrial sales, it said.

Emkay Global still sees upside in MGL and maintained its positive view on the stock amid strong volume growth, while retaining its negative view on IGL. "In the near term, the upcoming Maharashtra election may delay MGL's pricing action, but with a history of pricing proactiveness, the adverse profitability impact should be transitory," said Emkay Global.