In a significant market development, shares of Indraprastha Gas Limited (IGL) witnessed a sharp decline of 10% on November 18, trading at Rs 365.25 on the NSE. This dramatic fall comes in response to the government’s second consecutive monthly cut in Administered Price Mechanism (APM) gas allocation to City Gas Distribution (CGD) companies.
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The CGD sector faces significant challenges ahead, with companies needing to balance profitability with customer affordability. The absence of immediate price hikes post-festive season and lack of policy clarity continue to weigh on investor sentiment, suggesting a potentially challenging period ahead for IGL and its peers.
IGL Share Price: Understanding the Gas Allocation Cut
The latest reduction marks a 20% cut in domestic gas allocation, following a similar reduction announced on October 16. This consecutive decrease has created substantial pressure on CGD companies’ operational dynamics. IGL, in particular, has confirmed that this reduced allocation will “have an adverse impact on profitability.”
Industry-Wide Impact
The impact extends beyond IGL, affecting other major players in the sector:
- Mahanagar Gas Limited (MGL) reported an 18% cut, with shares dropping to Rs 1,181.4
- Gujarat Gas experienced a 4% decline, trading at Rs 465.1
- Adani Total Gas indicated a 13% reduction in allocation
Financial Implications
The severity of these cuts has prompted significant concern among market analysts and brokerages:
- Companies need to implement price hikes of Rs 4.5-4.8/kg to maintain margins
- Blended EBITDA could see an impact of Rs 2.7-3 per SCM
- Non-APM blended gas prices are hovering around $13-14/mmbtu
Brokerage Perspectives
Major brokerages have revised their outlook for the sector:
- Emkay Global highlights deteriorating margin outlook with no clear near-term solutions
- Nuvama Institutional Equities projects potential EBITDA hits of 43-63% by FY26
- Jefferies has downgraded both MGL and IGL to ‘underperform’
Company Response and Strategy
IGL is actively exploring various options to address this challenge:
- Engaging in “strong discussions” regarding gas price increases
- Evaluating possibilities of passing costs to customers
- Seeking alternative solutions to maintain operational stability
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FAQs
Q1: How will the APM gas allocation cut affect IGL’s profitability?
The 20% reduction in gas allocation will significantly impact IGL’s profitability as it forces the company to source more expensive non-APM gas. According to analyst estimates, this could necessitate price hikes of Rs 4.5-4.8/kg to maintain current margin levels.
Q2: What are the long-term implications for IGL share price?
Based on brokerage analyses, IGL’s share price might face continued pressure due to margin uncertainties and potential earnings downgrades. Jefferies has already cut their target price to Rs 295, suggesting a cautious outlook for the medium term.
