The recent reduction of over 20% in the allocation of Administrative Price Mechanisms (APM) gas to city gas distribution companies by GAIL India is expected to result in an increase in the prices of CNG (Compressed Natural Gas), as per analysts.
As communicated by Indraprastha Gas and Mahanagar Gas, the government has decided to cut APM gas allocation sharply from October 16, by around 21% for IGL and 20% for MGL from the current levels of 72%. While there has already been a sustained reduction in the extent of APM allocation (from over 85% at the beginning of FY24 to over 72% now), this reduction is the biggest one, ICICI Securities said.
The reduction is likely to impact the profitability of the CGD companies. The upcoming elections in Maharashtra are seen further limiting their ability to pass on cost increases to consumers at once.
Also Read Manappuram Finance shares tumble 18% as RBI takes action on subsidiary, Asirvad Microfinance Govt may halve spectrum lease tenure to 10 years OMCs may report weak Q2 on lower refining margins Government mulls more sops for oil & gas exploration
“This is being done to account for gas requirements of newer CGDs, lower gas production from older fields and to divert gas to the OPaL Petchem plant of ONGC. While volumes under the priority segment have been reducing steadily over the last 12–18 months, the extent of reduction at one go is a negative surprise,” ICICI Securities said.
Also ReadIndia’s Net-Zero Ambition: A Leadership Opportunity in the Global Clean Energy Transition
The brokerage highlighted that the extent of the hit is material, and suggests a Rs 3.2-4.4 per standard cubic meter (scm) or Rs 4.4-6.2 per kg price hike needed in CNG segments to sustain CGD companies’ margins.
In terms of volumes, ICICI Securities expects that priority sector allocation for Indraprastha Gas may potentially reduce to 4.5 mmscmd, and that for Mahanagar Gas to 2.0 mmscmd for FY26. For Gujarat Gas, it may reduce to 2.3 mmscmd.
“Our assessment of margins implies that in order to sustain margins at our current base case estimates, prices for domestic and CNG will need to increase by Rs 1.6-4.4 per scm, which seems challenging in the near term given the upcoming elections in Maharashtra/Delhi and the absolute quantum of the price hike,” it said.
» Read More
