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The Indian CGD sector outlook has become murkier with further APM gas allocation cut by the Government/nodal agency (GAIL). IGL/MGL has reported 20%/18% additional cuts wef 16-Nov on top of the ~20% cut earlier on 16- Oct, while Adani Total Gas (not rated) has indicated a 13% cut. While structural decline in APM allocation for the CGD sector is inevitable, the significant ~35% cut in the last one month with no proper policy communication is a negative. CGD companies highlighted post-Q2FY25 that the October cut was a major one with gradual cuts likely hereon and that prices would be hiked post-festive season to partially recover lost margins. However, no action has been seen so far and with this additional cut, the margin outlook has deteriorated with no near-term clarity on the course of action. Media reports quoting MOPNG officials have stated GoI asking for cost breakup, highlighting the high margins of CGDs vs OMCs, before green signaling them for retail price hikes (at least Rs4.5-5/kg required), which could add to negative sentiments. In the absence of price hikes, we estimate a 46%/25% hit on IGL/MGL’s EBITDA/scm vs Q2 run-rate which is Rs3.5/8 and against the latest guidance of Rs6-7/10-12, and our earlier estimate of Rs6.7-6.9/10.5-10.8. Excise duty alignment between CNG, petrol and diesel can be done to avoid CNG price hikes amid a USD70-75/bbl oil price scenario, if the current margins and return ratios of CGDs are to be protected. Due to the lack of clarity, we now assume a 14% RoE model for both IGL/MGL (in line with original open access regulations) vs 17%/18% earlier estimated for FY26-27E and cut our SA EPS by 17%/25%. Our TP for IGL/MGL reduces 18%/26% to Rs385/1,400 and we downgrade IGL/MGL to REDUCE/ADD from Add/Buy earlier. We await further commentary from companies and GoI to assume a less conservative scenario. IGL is currently trading at 2.3-2.6x FY25-26E adjusted P/B and MGL at 1.7-1.8x, which at 14% sustainable RoE and potential 7-10% volume growth seems reasonable.

Unexpected 18-20% additional APM gas allocation cut for IGL-MGL

The cumulative cut vs Q2FY25 levels is 37% for IGL and 34% for MGL; APM gas share in CNG mix would now become 40% and 43%, respectively, assuming Q2 volumes. The implied non-APM blended gas price for the companies were USD13-14/mmbtu, hence, replacement by such gases would impact blended EBITDA/scm by Rs2.7-3 and necessitate at least an Rs4.5-4.8/kg hike (just CNG segment would be Rs6.3-6.4/kg). This is on the back of new wells and HP-HT gas also being part of the mix, which we believe could come given OPaL requires 1.2mmscmd from the 2.5mmscmd additional diversion currently. A complete dependence on spot LNG can hit margins further.

Lower oil prices affect CGD economics, excise duty rejig can provide respite

With oil prices at USD70-75/bbl range, petrol and diesel prices also warrant cuts, which can affect CNG economics. But Rs9-10/kg of excise in CNG (14.4% rate) can be lowered coupled with hikes in petrol-diesel specific excise to provide respite to CGD margins. A halving of CNG excise to 7.2% can offset the entire margin hit from reduced allocation. While high CGD margins and returns among PSU and PSU-promoted oil and gas companies has been a topic of controversy, abruptly cutting allocation without any roadmap is unwarranted given GoI’s aim to almost triple CNG station network and expand DPNG connections by over 9x by CY30 from now, entailing a capex of almost Rs2trn.

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