City Gas Companies To Be Under Pressure On Monday On Increased Risk To Margins

City gas companies like Indraprastha Gas, Mahanagar Gas and Adani Total Gas could be under pressure in trade on Monday, after all the three companies announced that their domestic gas allocation from GAIL (India) Ltd. has been reduced in the range of 13-20%.

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

This cut also marks the second reduction of domestic or APM gas allocation. The first was done by Oil and Natural Gas Corporation Ltd. in October 2024.

As per the exchange fillings posted on Friday, Indraprastha Gas, Mahanagar Gas and Adani Total Gas have seen a 20%, 18% and 13% cut in allocation, respectively. The allocation cuts back in October were in the range of 16-20%.

After the recent cut, APM allocation to the city gas distribution companies, now stands at around 30-35%, as per Systematix .

When ONGC Ltd. announced its first cut, Emkay Research projected a potential Rs 1.4-1.5 per standard cubic meter margin impact for Indraprastha Gas (IGL) and Mahanagar Gas (MGL), which could worsen due to higher deallocation by GAIL (India) Ltd.

Systematix noted that, following the deallocation, IGL and MGL would need to replace 1.5 and 0.6 million standard cubic meter of gas per day, respectively—above the volumes they had to replace after the first deallocation. These volumes would likely be sourced from higher-cost high-pressure, high-temperature gas or spot LNG, trading around $13/MMBtu, much higher than the fixed APM gas price.

Higher gas sourcing from the spot LNG market would thus impact the city gas companies' operating costs.

As per IIFL Securities, decreased APM gas allocation remains a big overhang on city gas companies in the near term, especially for Indraprastha Gas and Mahanagar Gas.

Systematix states that to remain gross margin neutral, IGL and MGL will have to raise prices by Rs 6-8 per kg in CNG and undertake a similar hike in PNG prices. But a price hike of this large an amount would be difficult to take with Delhi and Maharashtra elections around the corner, states IIFL Securities.

The expected price hike also puts the companies' volume growth at risk. Higher prices would reduce CNG's price benefit over petrol and diesel and may dent their volume growth.