Sudden government notifications raise operational challenges for City Gas Distribution companies: PL Capital- Prabhudas Lilladher
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PL Capital- Prabhudas Lilladher, one of the most trusted financial services organisations in India, has released a report on Oil & Gas sector covering the recent announcement made by the government. The government has issued a notification slashing the Administered Price Mechanism (APM) allocation for City Gas Distribution companies (CGDs) by 20% for the second straight month. The sudden notification raises operational challenges for the CGDs in terms of arranging appropriate sources to compensate for the shortfall. The long-term implications are severe, where there is a threat to EBITDA/scm of all the companies. PL Capital has downgraded all CGDs to Sell with target prices of Rs 321 for IGL (12x Sep’26), Rs 1,046 for Mahanagar Gas (10x Sep’26) and Rs 389 for Gujarat Gas (20x Sep’26).
Post the first drastic cut of ~20% in mid-October 2024, the government has once again cut another 20% APM allocation to CGDs. This is a complete U-turn from 2014 when both CGD and PNG-domestic were allocated priority sector status for allocation of APM gas.
Price hike: PL Capital estimates that both cuts combined, if replaced by gas of ~12-13/mmBtu, would need a hike of Rs 8-10/scm. Currently, discount against diesel has narrowed drastically in major cities. At Mumbai for example, CNG sells at Rs 75/kg while diesel sells at Rs 90/ltr. Hike in CNG price would have a debilitating impact on conversion from diesel, thereby adversely impacting volume growth of the companies.
APM allocation likely only for domestic PNG: Speaking with industry experts, it also appears that slowly, the APM allocation may only be left for the PNG-domestic portion and CNG may be left out of the current priority sector definition.
Volume growth of all CGDs under threat: While conversion from petrol to CNG was slowing down in older geographical areas, conversion from goods carriers was still a good contributor, especially as witnessed in Delhi and Mumbai. However, with expected rise in CNG prices, this segment of growth would also be adversely impacted.
Downgrade all to Sell: While it is a little premature to understand the impact on volume ad margins, PL Capital has not cut their EPS estimates so far. However, due to the threat in both, it has cut down on their multiples, thereby resulting in downgrading all to Sell.
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