Shares of Mahanagar Gas Limited (MGL) plummeted 17.50% to ₹1,083.00 on November 18, following the government’s decision to cut the Administered Price Mechanism (APM) gas allocation for city gas distribution (CGD) companies by 20% for the second consecutive month. The move has significantly impacted the profitability outlook for players like MGL and IGL, leading to a sharp sell-off in the sector.
Key Factors Behind the Decline:
- Further APM Gas Allocation Cuts:
- MGL confirmed an additional 18% reduction in domestic gas allocation, compounding the ~20% cut in October.
- This has increased reliance on higher-cost imported gas, which will weigh heavily on margins.
- Profitability Concerns:
- Rising gas replacement costs could reduce EBITDA per standard cubic meter (EBITDA/scm) by ₹2.7-3.0.
- Price hikes of ₹4.5-4.8/kg are required to partially offset the impact, but no increases have been implemented yet.
- Brokerage Downgrades:
- Jefferies: Downgraded MGL to ‘underperform’ with a target price of ₹1,130/share, citing a 31% EPS cut due to deteriorating margins.
- Emkay Global and Nuvama Institutional Equities: Warned of a potential 43–63% hit to EBITDA in FY26 if price hikes are delayed.
- Sector-Wide Pressure:
- CGD companies like MGL and IGL are facing similar challenges, with Gujarat Gas also being downgraded to ‘hold’ due to concerns over shrinking margins and limited domestic gas supply.
Investor Sentiment and Market Reaction:
- Heavy Selling Pressure: The abrupt pace of APM gas allocation cuts and lack of clarity on pricing strategies have spooked investors, leading to a sharp sell-off in MGL shares.
- Sector Outlook: The broader CGD sector remains under pressure, with analysts forecasting long-term profitability challenges unless pricing adjustments are made.
While CGD companies are exploring options to mitigate the impact, the abrupt policy changes and increasing input costs pose significant headwinds. Analysts have flagged a decline in EBITDA margins, which could only be alleviated by swift and substantial price hikes. However, the lack of policy communication and delayed action on pricing has added to market pessimism.
Disclaimer: The information provided is for informational purposes only and should not be considered financial or investment advice. Always consult a financial advisor before making investment decisions.
