Shares of Gujarat Gas Limited (GGL) dropped 6.17% to ₹456.00 as of 11:31 am on Monday, extending the sell-off among city gas distribution (CGD) stocks. The fall comes in reaction to the government’s decision to further reduce the Administered Price Mechanism (APM) gas allocation for the second consecutive month.
Key Factors Impacting Gujarat Gas and Sectoral Peers:
- APM Gas Allocation Cuts:
- The reduced allocation of cheaper domestic gas has forced CGD companies to rely on higher-cost liquefied natural gas (LNG) and other alternatives. Analysts estimate the deallocation affects 9–11% of overall volumes, dealing a blow to profitability.
- Brokerage Downgrades:
- Nuvama Institutional Equities downgraded Gujarat Gas to a ‘hold’ rating, citing lower exposure to priority sector volumes compared to peers but still highlighting the adverse impact on margins and volumes.
- Jefferies and JP Morgan also issued downgrades for CGD companies, slashing their target prices.
- Rising Input Costs:
- Replacement of cheap gas with LNG and HPHT (High Pressure High Temperature) gas has significantly increased input costs, likely impacting Gujarat Gas’ EBITDA margins.
- Sector-Wide Impact:
- Shares of Indraprastha Gas (IGL) and Mahanagar Gas (MGL) plunged 18.73% and 13.35%, respectively, amid similar concerns. Analysts have flagged the possibility of further APM allocation cuts, exacerbating the negative sentiment.
Analyst Commentary:
- Nuvama Institutional Equities: “The recent APM de-allocation will impact volumes and margins in the near term. We expect margin compression unless companies hike prices, which hasn’t happened yet.”
- Global Brokerages: Downgraded the sector due to worsening profitability outlook and lack of policy clarity.
Outlook:
While Gujarat Gas remains less exposed to priority sector volumes compared to its peers, the ongoing price pressures and uncertainty surrounding APM gas policies may weigh on its near-term performance. Market participants will look for clarity on future government policies and potential price hikes by CGD companies to recover margins.
TOPICS:
Gujarat Gas