Cut In APM Gas Allocation To City Gas Companies Driven By Falling Output

The reduction in gas allocation to city gas distribution companies under the administered price mechanism, or APM is driven by a decline in output from legacy fields, according to people familiar with the matter.

The output has fallen by around 7% on a compounded annual growth rate basis, whereas the demand from the city gas firms has kept on increasing, the persons told NDTV Profit.

The demand from city gas companies for natural gas is expected to rise to 85 million metric standard cubic meters by 2030 from 58 mmscmd at present, they noted.

City gas companies like Indraprastha Gas Ltd. and Mahanagar Gas Ltd. slumped on the bourses on Monday, after the two companies announced that their domestic gas allocation from GAIL (India) Ltd. has been reduced in the range of 13-20%. At 2:28 p.m., shares of IGL were trading 19.4% lower at Rs 326.7 apiece on the NSE, whereas MGL was down 14.5% at Rs 1,122.1.

City gas companies mainly get domestic gas allocation at a fixed price of $6.5 per million metric British thermal unit for their CNG sales volume requirements. Reduced allocation of this domestic gas has a negative impact on the companies' profitability.

As per the persons aware of the development, the government wants city gas distribution companies to prepare for market driven prices.

Firms like IGL, MGL and Gujarat Gas Ltd. have high margins and can absorb the price hikes, they said, while adding that the government has sought cost breakup from the city gas distribution firms.

The allocation of 3.2 mmscmd gas by the state-run Oil and Natural Gas Co. to its subsidiary ONGC Petro additions Ltd. could be another reason behind the cut in APM gas allocation to city gas companies, the people quoted above said.

Notably, the cut in APM gas allocation is expected to hit the margins of city gas distribution firms, which will in turn affect their future capital expenditure plans.

In October 2024, when ONGC announced a reduction in APM gas allocation to city gas firms, Emkay Research projected a Rs 1.4-1.5 per standard cubic meter margin impact for IGL and MGL. This has now worsened to a Rs 2.7-3 per standard cubic meter impact.

Jefferies expects IGL, MGL and Gujarat Gas' per unit Ebitda margins to see a sharp fall of Rs 2.5, Rs 1.5 and Re 1 per standard cubic meters in fiscal 2027. The brokerage also lowered its earnings per share estimates for fiscal 2026 for the three companies in the range of 19-31%.