While two successive cuts in allocation of cheaper APM gas to city gas distribution companies (CGD) have caused their stocks to fall steeply, analysts expect another price hike for compressed natural gas (CNG) for these firms to sustain their margins.
State-owned GAIL India, the nodal agency for domestic gas allocation, has decided to cut Administrative Price Mechanisms (APM) gas allocation sharply from November 16, by 20% for Indraprastha Gas and by 18% for Mahanagar Gas from their previous allocation. This cut has come over and above the cut of 20% effective October 16.
The stock price of IGL on Monday plunged by 20% to Rs 325.05 while that of MGL declined by 14% to Rs 1,133.55.Shares of Gujarat Gas also declined by 7% Rs 453.35 after the reduction in domestic gas allocation. In the last one month, both IGL’s and MGL’s stock price have fallen over 28% while that of Gujarat Gas has fallen by 19%.
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“This (de-allocation of APM gas) would reduce blended allocation for the priority sector from 57% to 46% (which was reduced to ~57%, from 70%, effective Oct 16),” said ICICI Securities. “The previous cut in allocation required a price hike of Rs 4.4-6.2 per kg in the CNG segment for the CGDs which they haven’t taken yet. Now however, a further additional price hike of Rs 2.5-2.8 per kg could be required to maintain margins assuming no reduction in costs from some other source.”
Motilal Oswal estimates that after the recent de-allocation, CGD companies are only receiving 35-40% of gas for overall CNG requirement. The brokerage highlighted that the extent of the hit is material, and suggests a Rs 5-6 per kg price hike needed in CNG segments to sustain CGD companies’ margins.
Analysts believe that a price hike by CGDs (in CNG segment) at one go would be difficult,
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