Indraprastha Gas And Mahanagar Gas' Margin Pain Likely To Continue In Near Term—Here's Why

Indraprastha Gas Ltd. and Mahanagar Gas Ltd. may experience further decline in unit margin after having contracted by over 20% year-on-year in the second quarter of fiscal 2025 due to several negative developments ranging from lower subsidised-gas allocation to higher gas costs and increased competitions.

This has led analysts to cut these companies' earnings estimates for fiscal 2025 and 2026.

Here are the key factors that stand to hurt gas companies:

Indraprastha Gas and Mahanagar Gas reported over a 20% reduction in the administered price mechanism, or APM, gas allocation for their CNG sales in October 2024, resulting in lower subsidised gas, which negatively impacts profitability.

Emkay Research estimates this cut could reduce CNG margins by Rs 2 per standard cubic meter. Nuvama predicts gas costs for Indraprastha Gas may rise by $0.4 to $0.6 per million British thermal unit, potentially leading to an 18-25% decline in fiscal 2026 Ebitda, while that of Mahanagar Gas would drop by 13-22% Ebitda during the same fiscal.

Indraprastha Gas' management suggested that CNG prices in Delhi may need to increase by Rs 5-6 per kilogram to maintain their earlier margins, though the timing of these hikes still remains uncertain.

The companies with reduced APM gas allocations will need to rely on gas imports. Due to a series of project delays and stronger-than-expected fuel demand in Asia, market expert Javier Blass expects the LNG market to remain tight next year and possibly until mid-2026.

Blas suggests that buyers won't regain leverage in terms of price until early 2027, when new supply becomes available. This scenario is unfavorable for Indraprastha Gas and Mahanagar Gas..

The recent notice from the Petroleum and Natural Gas Regulatory Board to city gas distribution companies has created a significant overhang in the market. The notice has declared 73 city gas distribution networks as common carriers, which could end exclusivity for three of Mahanagar Gas' geographical areas and two of Indraprastha Gas.

Declaring networks as common carriers could potentially increase sector competition and reduce the profits of existing companies. It could also increases the regulatory burden on operators and cause potential delays in network expansion.

Indraprastha Gas' management has cut the company Ebitda per standard cubic meter guidance to Rs 6-7 due to APM de-allocation.

On the other hand, Mahanagar Gas is optimistic of meeting its earlier guided Ebitda margin of Rs 10–12 per standard cubic meter in the current fiscal.

Indraprastha Gas said its focus will be on volume growth, despite pressure on margins in the near term. Nuvama Research anticipates the company to experience robust volume growth as a result of the management's emphasis on volume, significant vehicle additions in the CNG sector, and the development of infrastructure in new areas.

Mahanagar Gas also expects good volume growth and has updated its fiscal 2025 volume growth guidance to low double-digits from 7–8% guided earlier due to strong demand prospects from all segments.