Citi Slashes City Gas Companies' Targets And Earnings Estimates On Successive Gas Allocation Cut

Citi Research followed global brokerages by slashing earnings estimates and target prices of city gas distributors after the "unexpected" second successive gas allocation cut.

Domestic gas companies, earlier this week, announced that their domestic gas allocation from GAIL (India) Ltd. has been reduced in the range of 13-20%, leading to a likely Rs 6-8 per kg price hike for retail buyers.

This cut also marks the second reduction of domestic or APM gas allocation. The first was announced in October 2024.

Indraprastha Gas Ltd., Mahanagar Gas Ltd. and Adani Total Gas Ltd. have seen a 20%, 18% and 13% cut in allocation, respectively. The allocation cuts back in October were in the range of 16-20%.

Citi cut the Ebitda estimates for Indraprastha Gas, Mahanagar Gas, and Gujarat Gas by 21%, 5-10% and 8-9%, respectively.

The brokerage has a 'sell' rating on Gujarat Gas with a target price of Rs 440 per share, down from Rs 490 apiece earlier, implying a downside of 2.35% from the previous close. Citi has a 'buy' rating for Indraprastha Gas, Mahanagar Gas with a reduced target price of Rs 450 per share and Rs 1,650 apiece, respectively.

At current levels, the downside in both stocks may therefore be limited, the brokerage said. "However, the absence of positive catalysts and uncertainty on further policy surprises may limit near-term upsides and lead to time correction."

The current levels could, nonetheless, start offering an attractive opportunity to investors with a longer-term horizon, Citi said.

Share prices of gas distribution companies fell on Monday after Jefferies downgraded stocks and slashed their target prices after the reduction in domestic gas allocation.

According to Jefferies, the gas distribution firms may face a complete nil allocation of domestic gas by mid-2025, which could put additional pressure on their margins.

IGL and MGL, both leading players in the Indian city gas market, rely heavily on affordable domestic gas for their CNG sales and PNG distribution to residential and industrial consumers.